Risk Analysis on Investment Decision

1101 Words Nov 9th, 2007 5 Pages
Risk Analysis on Investment Decision
Net present value, internal rate of return, and profitability index are measures used to compare two mutually exclusive capital investment proposals. "SAI wants to increase market share and keep up with technology, which can be done by either expanding their existing Digital Imaging market share or by entering the Wireless Communication market," (UoP, 2007). Both alternatives have areas of opportunity as well as potential risks that the company will have to consider. This paper will analyze the investment risk decisions SAI currently faces with the objectives of increasing its market share and keeping pace with technology.
An analysis reveals that an expansion into the wireless communication market
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Capital risk results directly from money that the company invests. If assets are invested in another currency, fluctuations in currency value create currency risk. Assets that are not easily sold because the market is small and takes a long time to sell create liquidity risk. Since SAI 's investment is proposed for the US, the company might also want to borrow money for this project in the US. This is especially true to mitigate longer term exchange rate risks. Borrowing money in the same country as the investment reduces the company 's net exposure to currency risk (meaning the rate of exchange between a foreign currency and US currency). They would have assets located domestically and liabilities located in domestically. The closer those two numbers become, the less exposure SAI has to currency risk, (Plesko, 2007).
Another way that financial risk can be mitigated is by hedging using the correlations of stocks (Capital Asset Pricing Model). This is the relationship between return and risk for portfolios. In a portfolio, two assets are considered to be hedged if they have a negative correlation whereby a loss in one results in a simultaneous gain in the other. The CAPM is the most popular financial model used to evaluate returns on portfolios, (Choudhury, 2003).
It is challenging to completely remove bias from one 's analysis. By adjusting one 's stance (conservative, moderate, or aggressive), one can make the values of
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