ABSTRACT
This chapter addresses the concept of risk and return by discussing the different risk preferences and how risk applies to the airline industry. A key investment strategy used to reduce risk is to hold a portfolio of different assets, since this reduces the potential consequences, should one investment perform badly. One way of measuring risk is the variance of a security’s historic returns, using an appropriate timeframe. Risk-averse investors are typically investors who stay away from adding high-risk assets to their portfolio. Dividend income is commonly received from purchases of stock since profitable companies typically re-direct a portion of their earnings back to their shareholders. The capital asset pricing model provides investors with a baseline valuation tool to project an appropriate required rate of return of an asset. The most common and successful investment strategy applied to reduce risk is diversification, the technique of mixing a wide variety of investments in a single portfolio.
