Risk Analysis on Investment Decision
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 may be beneficial to SAI. SAI 's specialized chip, used in data enabled mobile phones, has performed well in pilot tests, (UoP, 2007). A number of risks, internal and external, are inherent in joining this industry. Similarly, a number of strategies are available to mitigate these risks.
One risk associated with the decision to enter into wireless communications is that of market risk. Market risk is made up of the uncertainties of changes to market prices or rates. While this type or risk is a little harder to foresee than others, SAI can lessen its risk. Diversification is a logical way to reduce market risk. Diversification is an investment technique that mixes a wide variety of investments within a single portfolio, (Investopedia, 2007). It asserts that a portfolio of different kinds of investments will on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio. Market risk is further subdivided into systematic and unsystematic risk. "Systematic risk is any risk that affects a larger number of assets, each to a greater or larger degree," (Ross, et al., 2005, p. 275). Unsystematic risk is the risk that specifically affects a single asset or small group of assets. While
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 may be beneficial to SAI. SAI 's specialized chip, used in data enabled mobile phones, has performed well in pilot tests, (UoP, 2007). A number of risks, internal and external, are inherent in joining this industry. Similarly, a number of strategies are available to mitigate these risks.
One risk associated with the decision to enter into wireless communications is that of market risk. Market risk is made up of the uncertainties of changes to market prices or rates. While this type or risk is a little harder to foresee than others, SAI can lessen its risk. Diversification is a logical way to reduce market risk. Diversification is an investment technique that mixes a wide variety of investments within a single portfolio, (Investopedia, 2007). It asserts that a portfolio of different kinds of investments will on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio. Market risk is further subdivided into systematic and unsystematic risk. "Systematic risk is any risk that affects a larger number of assets, each to a greater or larger degree," (Ross, et al., 2005, p. 275). Unsystematic risk is the risk that specifically affects a single asset or small group of assets. While
References: Choudhury, G. (2003). What is financial risk? Retrieved September 20, 2007, from http://www.theshortrun.com/finance/Chou 's%20SR%20article.doc. Cost of Capital. (2007). Dictionary by LaborLaw Talk. Retrieved on September 23, 2007, from http://dictionary.laborlawtalk.com/cost_of_capital. Investopedia. (2007). Diversification. Retrieved September 23, 2007, from http://www.investopedia.com/terms/d/diversification.asp. Plesko, M. (2007). Lecture Notes: Financial Risks. Retrieved September 23, 2007, from University of Phoenix, Main Course Forum, MBA540 – Maximizing Shareholder Wealth. Ross, S. A., Westerfield, W.W., & Jaffe, J. (2004). Corporate Finance. [University of Phoenix Custom Edition e-text]. New York, NY: McGraw-Hill. Retrieved September 22, 2007, from University of Phoenix, rEsource, MBA540 – Maximizing Shareholder Wealth. University of Phoenix. (2007). Capital Budgeting Simulation. Retrieved September 22, 2007, from University of Phoenix, rEsource, Week 3 Simulation, MBA540 – Maximizing Shareholder Wealth.