Risk and the Required Rate of Return: Risk and Return

A firm’s risk and expected return directly affect its share price. Risk and return are the two key determinants of the firm’s value. It is therefore the financial manager’s responsibility to assess carefully the risk and return of all major decisions to ensure that the expected returns justify the level of risk being introduced. The financial manager can expect to achieve the firm’s goal of increasing its share price (and thereby benefiting its owners) by taking only those actions that earn returns at least commensurate with their risk. Clearly, financial managers need to recognize, measure, and evaluate risk–return trade-offs to ensure that their decisions contribute to the creation of value for owners.

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