chapter  4
35 Pages

Assessments of risk and return

The returns on investment are generally associated with the amount of risk that individuals and firms are willing to take. In fact, every decision in life contains some degree of uncertainty, no matter how insignificant the risk factor. When an airline makes a decision to buy an aircraft, the decision is not only influenced by the expected return on that aircraft, but also by the associated risks. As can be seen from the major aircraft manufacturers’ recent history with new airframe programs, the risk of a delay in production is clearly high, resulting in higher costs and delayed deliveries to airlines. Similarly, there is a risk that a recently purchased aircraft will incur mechanical defects that are not covered by warranty, the degree of which can depend on a host of factors, such as the aircraft’s reliability, the manufacturer’s reputation, and how intensively the aircraft is flown. The Boeing 787 is just the latest new aircraft type to suffer problems, with serious implications for the airlines that had purchased it and which had been relying on it entering service on time. Ultimately, in finance, analyzing the risk that a company faces occurs within a similar qualitative framework as determining the company’smarket position, analyzing financial statements and identifying the company’s long-term threats and opportunities.