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Return versus Risk

Stocks selected are Royal Bank of Canada and Suncor are the stocks chosen.

In two paragraphs, describe the concept of "return versus risk" and explain how you would use it in selecting a new investment portfolio. Explain how and why you used (or did not use) this concept when you chose your original two stocks. In your explanation, ensure that you answer the following questions:
1. What would you do differently if you were to choose another two stocks for your portfolio? Explain your answer.
2. What specific actions could you take in the future when choosing stock investments to reduce risk and increase the reward in your portfolio?

Solution Preview

The risk/return principle states that if an investor is willing to take on a higher risk level, then the investor has every reason to expect a higher return. In essence, the higher the risk, the higher the return expected (but not necessarily obtained). With higher risk comes the possibility of higher losses as well. So when we look at the concept of risk, we have to come to terms with the amount of risk we are willing to accept. Low risk in the current market translates to an expected return in the range of 2-4%; moderate risk translates to 4-6%; high risk translates to 7% and above. Now if we look at the two stocks selected above, we notice the following:

SUNCOR: Current price is $31.59, with the 52 week hi and lo at $37.37 - $25.95 (so the current price is just about midway between the two. The beta is 1.86, which indicates that the portfolio of this firm is considerably out performing the market. The one year target price is $42.39, which represents a return (before taxes) of approximately 35% if the target price is realized (this would not be considered a low risk scenario - especially since it is a foreign stock and it is in the mining sector, which is notoriously dependent upon the economy.

ROYAL BANK: Current price is $62.94, with the 52 week high and low at $63.76 - $46.80 (so it ...

Solution Summary

This discussion focuses on the ability and prospect of investing in foreign stocks for a risk averse investor. It deals with the return on the investment, the risk involved, and options to consider in order to reduce the risk while increasing the over all return.

$2.19