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Finance & Accounting
Pages 9 (2259 words)
There is strong relationship between risk and return in finance. In fact most financial theories and assumptions are based on the relationship between risk and return. In very simple financial theory as the risk of an investment increase so does the expectation of return from that entity.
Some risks can be diversified away through investing in portfolios of investments which diversify each other’s risk. The risk that can be diversified away is called diversifiable risk or unsystematic risk. On the other hand systematic risk cannot be diversified and is thus also called un-diversifiable risk. Economic and political risk is inherent risks of operating in a country. The economic risk is the risk that economy of that country would change for the worse. This change could be due to bad management or uncomprehend able natural causes, such as reduction in oil prices for a country which has oil as its primary export. Political risk on the other hand points towards the stability in the country. This is the risk that there would be political turmoil in a country which would result in loses on investment. The recent changes in the Arabian Peninsula are changing the shape of Arab politics for ever. There have been major political changes in countries like Egypt, Libya and Syria. These political changes would in due course of time bring positive changes in the region and contribute to the economic stability and wellbeing of local. However these changes have also created a sense and environment of uncertainty in the political environment of the region. There is confusion as to which country would be affected by this political upheaval next. ...
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