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Return on risk

PROFITABILITY RISK

Accelerate your business with these expert tips on "Profitability risk". Analyse and discover this TIP!

Investment risk return is the ability to generate returns. In an investment, future returns are not certain. They may be large or modest, they may not occur, and they may even mean losing the capital invested. This uncertainty is known as risk.

There is no investment without risk! But some investments are more risky than others. The The only reason to choose a risky investment over a risk-free investment alternative is the possibility of a higher return. At all investment alternatives high profitability The expected high risk taken.

The more leveraged I am, the more I can earn, but at the same time I am taking on more economic risk (see TIP scalability).

For equal risk conditions, one should opt for the investment with higher profitability.

For the same performance conditions, the investment should be chosen with less risk.

The higher the risk of an investment, the higher its potential return will have to be to be attractive. Each individual decides the level of risk he or she is willing to take in search of higher returns. As we can see in this graph, the investment strategies are often classified as "conservative", "aggressive", "moderate", etc., terms that refer to the level of risk taken, and hence the potential return sought.

The more risk is taken, the more return should be demanded. Likewise, the higher the return sought, the more risk must be assumed.

Watch out!

Risk and return go hand in hand, but accepting higher risk is no guarantee of higher returns. "A riskier investment produces a higher return - except when it doesn't!

Exercise:

  1. Seek all possible investment alternatives at 10,000 euros.
  2. Calculate the expected return and the probabilities of losing (risk) and rank them from highest risk to lowest... do it in groups by discussing and then sharing.
  • Profitability Risk.
  • Lottery the highest the highest.
  • My company.
  • Other Startups.
  • Venture Capital Fund.
  • Stock exchange.
  • Lending money.
  • Fixed Income.
  • Freezer Low 0 (-) low 0.
USUALLY COME TOGETHER: A LOT OF RETURN WITH A LOT OF RISK...

Investing in my company is one of the few alternatives that can break this general rule by obtaining good returns by investing the right amount with prudence... An business angel you can invest spare money (low aversion) and earn a lot x10... with high risk because you know that the 80% companies fail.

Profitability risk in a new venture

Risk and return are key concepts in any business, especially in a new venture where uncertainty is high at the beginning, and higher in the early stages. In general, the higher the risk taken, the higher the potential return that can be obtained. However, there is also the possibility of significant losses. In a new venture, profitability can be difficult to predict due to lack of historical data and market uncertainty. In addition, initial investment and start-up costs may affect profitability in the short term. Therefore, Investors must be aware of the risk they are taking when investing in a new company and be prepared to accept potential losses.

On the other hand, start-ups often offer higher profitability opportunities than established companies, as they are at an early stage of growth and may have more potential to increase revenues. However, this comes with higher risk, as the company has not yet proven its business model and may be vulnerable to changes in the market and competition. In a nutshell, in a new venture, risk and return are closely related and investors should be aware of both factors when considering an investment. It is important that the company has a sound plan to manage risk and maximise long-term profitability.

Why is it important to consider risk and return when investing in a new venture?

It is important to consider risk and return in the investment of a new venture because the two variables are closely related. On the one hand, risk is related to the uncertainty and the possibility of loss of the investment, while profitability refers to the potential return on the investment. In the context of a new venture, it is common for there to be higher associated risk due to uncertainty around its future viability and profitability. It is therefore important to carefully assess the relationship between risk and potential return on investment to determine whether the risk is worth taking. While higher risk is generally associated with higher potential gains, it can also lead to significant losses. It is therefore essential to consider both factors when making investment decisions in a new venture.

What are some strategies for balancing risk and return in a new venture investment?

Some strategies for balancing risk and return in the investment of a new venture could include:

  1. Diversification (+): Instead of investing all the capital in one company, you can invest in several companies with different levels of risk and return. In this way, if one company fails, the investment in the other companies can compensate for the loss. 
  2. Risk analysis: Before making an investment, it is important to conduct a detailed analysis of the risk involved. This may include analysing the market, the competition, the financial strength of the company, among other factors.
  3. Gradual reversal: Instead of investing all the capital at once, you can make a gradual investment in the company. This allows you to limit your risk and see how the company performs before investing more capital.
  4. Professional advice: Seeking advice from investment and financial experts can help to make informed decisions and reduce the risk of loss.
  5. Hedging strategies: financial instruments such as futures contracts or options can be used to hedge the risk of loss on an investment.

It is important to remember that there is always risk associated with investing in a new venture and there is no perfect strategy for balancing risk and return. Each investor must assess his or her risk tolerance and make informed decisions based on his or her financial objectives and circumstances.

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Picture of Jaime Cavero

Jaime Cavero

Presidente de la Aceleradora mentorDay. Inversor en startups e impulsor de nuevas empresas a través de Dyrecto, DreaperB1 y mentorDay.
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COMENTARIOS

  1. SOURCES OF FINANCING - Mentor Day WikiTips

    [...] someone lends me his money for a period of time, demands a return in return to cover the risk that I will not pay him back, and also needs collateral. Depending on the [...]

  2. José Luis Prieto Calviño

    Risk vs. Return

  3. Paul Lejarza

    There are different types of risks for the investor, but most investors are concerned with only one, the risk of losing money. With all the noise that the mass media is capable of making about the markets in general, it is easy to see why few investors can escape making bad decisions.

  4. Luis-Fernando Robledano-Esteban

    Well summarised impact and risk calculation. If X happens with a probability of PX% and the impact (e.g. economic) is IX and the probability of X not happening is therefore 100%-PX and the impact is 0 (or the economic gain corresponding to X not happening, PNX): IX * PX + INX*(1-PX). If one does not have knowledge of probabilities it can be confusing but what is key is that one can put all the risks in a table and make calculations of the different scenarios.

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