There are a number of ‘metrics’ used for calculating ‘risk’ and ‘return’…conside

Question

There are a number of ‘metrics’ used for calculating ‘risk’ and ‘return’…consider NPV (net present value) as a measure of ‘return’…do you agree with this method as a means of determining the ‘value’ of a given project/investment?

Also, ‘risk’ is often measured by standard deviation and beta…’what’ value might either/both of those measures have in evaluating ‘risk’ to a given investment/project?

Lastly, with regard to either ‘risk’ or ‘return’, feel free to address ‘other’ measures as generally used by the investment community?

Explanation / Answer

Yes, I agree with the net present value (NPV) as a means of determining the value of a given project / investment.

Explanation:- NPV is the difference between Present value of cash inflows and the Present value of cash outflows over the life of project. NPV takes into account both the quality and the scale of investment / project. NPV provides an absolute measure. As the objective of financial management is to maximize the shareholders wealth, thus NPV is one of the good method as a means of determining the ‘value’ of a given project/investment.

Beta can be used as a measure in evaluating the risk of a given investment / project in following manner:-

1) If Beta is more than 1, it means the given project / investment is more risky.

2) If Beta is less tha 1, it means there are very less fluctuations in the investment / project over the life time of project / investment.

Standard Deviation can be used as a measure in evaluating the risk of a given investment / project in following manner:-

The more a investment's/project's returns vary from the investment's/project's average return over the life of project /investment, the more volatile the investment/project is and vice-versa.

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