Advise on how the investors manage both risks and return

1.0 Introduction

This report is about to suggest the investor deal with the risk and return of their investment on the corporations equity of. The report will be written to give advice to individual investors. The report will analyze both risks related with investment on equity and risks of affecting investors to gain investment income that. Moreover, CAPM model will be analyzed to investors. At last the report will provide advice to the investor which can enable them to manage their investments.

2.0 Types of risks There are main two forms of risk for the ordinary companies that may influence the following financial performance of the company. There are two forms of risk:

the non-systematic risk of the enterprise

the risk is the systematic risk of the whole marketThe first type of the risk is the non-systematic risk of the enterprise.

This risk is always relate to the specific business operation of the certain enterprise which are risks posed by entitys action different from others. The non-systematic risks can be classified into the credit risk, financial risk, management risk, liquidity risk, and operational risk. The non-systematic risk is different from the investors can escape these risk by following the actions of the company and keep abreast of all news and rumors in the stock market. In this case, as a primary lender this enterprise would faces credit risk which is an inherent component of its business operation of lending and asset purchase while their current corporate bonds that listed on the London Stock Exchange Order Book for Retail Bonds is also used to get the additional working capital for the ordinary business operation (Paulsson, J., 2013). The methods that used by these financial enterprises to prepare the negative effects of interest rate movements also include the asset portfolio and the introduce of the long term corporate bonds to the current capital structure.

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2.2 Systematic riskThe second is the systematic risk of the whole market.

The systematic risk also known as the market risk that would affect the whole market such as the Great Depression and the European Sovereign Debt Crisis. The risk cannot be totally avoided and also cannot be predicted. For the ordinary companies, a further deterioration and potential recession of the whole macro-economic environment may bring up the adversely effect to the all aspects of the ordinary business operation. The adverse effect of the deterioration and potential recession might increase the risk of the large number of borrowers and decrease their capability to repay the loans, which may in turn increase the whole costs of a radical financial structure or limit the companys further ability to finance in the market. The adverse changes arising from systematic risks such as the current Financial Crisis can reduce the ability of recovery and assess of the lenders assets. Then changes of rising benchmark rate of the central banks may adversely affect the enterprises net income and profitability. Through the systematic risk cannot be eliminated, the enterprises can rely on the diversification, hedging or the right asset allocation to make the preparation for the system risk.

3.0 Advices of managing risks3.1 Important Ratios analysisThe aim of the investors who purchase equity in the form of shares is to get the return for an economic added value. Also, investor can reduce or avoid risks through analyze some key ratios. The return on their investment mainly refer to the cash received as a distribution of free cash flow such as the dividends and the capital gain made on the resale of the shares like the cash profit.

3.2.1 P/E ratio

Earnings ratio (P/E ratio) is a valuation ratio of a companys share price compared to its earnings of per share. The ratio demonstrates that ithe higher P/E ratio company is, the higher risky the share is (Arnold, J. and Turley, S., 1996). Then the formula of the Price/Earnings (P/E) Ratio is as following formula.

P/E = Market Value per Share / Earning per share(EPS)

During the period of the year ended 30 September 2013 the Groups profits before taxation increased by 10.4% to 105.4 million (2012: 95.5 million). The earnings per share of the enterprise increase up 17.4% from 24.2p in 2012 to 28.4p in 2013. In this case the company with a Market Value per Share of 3.68 and an EPS of 48.4p the P/E ratio of the enterprise would result (3.68 / 48.4p = 7.6).

The P/E ratio climbed indicates that the increase in risk of investment. Higher risk may bring high return but also bring high loss. Investor may look down of the company. There is an advice for investor that they have to face the risk in right way and deal with the potential risk. 3.2.2 Dividends yield

This ratio shows the investment income in the form of dividend is in basis of shares market price. High dividend can attract investors. The formula of the Dividends yield is :Dividend Yield = annual dividend per share / price of stock per shareIn the case, annual dividend of corporation is 7.2p and the stock trades at 3.68, the Dividend Yield is 2%. (7.2p / 3.68 = 0.02). According to the newest dividend policies from Paragon-group internet that was approval at the Annual General Meeting on 6 February 2014, the dividend will be paid on 10 February 2014, by reference to a record date of 10 January 2014.

It shows that the dividend paid for ordinary shares per share of the Paragon group increased up 20% from 6.0p in 2012 to 7.2p in 2013. It is obvious a increase on dividend paid that investors satisfy the performance of the company. There is an advice for the investors that they should select company of bring potential benefits and also can enhance investors faith to earn more profits from dividend payment.3.2 Capital Asset Pricing Model For investors, the Capital asset pricing model is simple and clear with the three factors including the systematic risk that is always wrote by the quantity beta (), the expected return of the market and the expected return of the certain risk-free asset(Jensen, M., & Scholes, M., 1972). But this model has the disadvantages. For example, the different types of cost, taxes, and asymmetric information exist in the market increases of the friction and difficulties on evaluating and selecting due to the existing of various type of costs, taxes and asymmetric in the market (Arnold, G., 2013).

The formula of the model is as following:

In fact, the return rate of the investor acquired the price of stock to increase (decrease) and the capital gains (or losses), to add the stock of the cash dividends or equity dividends (Fama, E. F., & French, K. R., 2004).

It can be seen from the above formulas that the return of the equity largely related with the overall market trend and the specific dividend policies. Such as the Paragon group has the sustainable cash flow and income while the better dividends policies which would lead the investment of the enterprises equity to get the well return. The investor can maximize the utility and return from investment.

4.0 Returns on investment

The returns mostly come from the following three aspects.

At first, the capital gain can be regarded as the profit from the cash gain of the equity investment. It is sometimes referred as the net cash flow. For the equity investor, they can gain profit in price in stock transaction, which investor selling shares in the higher price than original shares that bought in the stock market. Secondly, the pursuit of investors for maximum return, the payback period and the regular flow of dividends is important. Dividend is a taxable payment based on the numbers and classes of shares held by them.

At last, a right and diversified investment portfolio also the better the way to maximize investor returns. When the stocks market rise, a substantial increase in the proportion of equity investments would help to the pursuit of increased revenue (Higgins, R. C., 2009). Investors can profit by selling the increased securities in markets.5.0 Summary

It can be concluded that there may be the risk of investor not receiving a return on their investment. Then investors should pay attention to the information from the perspective of P/E ratio and dividend Yield. The investors also should diversify your portfolio the share price movements of market and the selected company, results of growth over periods of time should be take into account. The investors also seek professional help to manage investment such as the fund managers and financial planners. ReferenceArnold, J. and Turley, S. (1996) Accounting for Management Decision. 3rd Ed. London: Prentice-Hall

Higgins, R. C. (2009) Analysis for Financial Management. International. Ed. Boston; London: McGraw-Hill Irwin.

Fama, E. F., & French, K. R. (2004). The capital asset pricing model: theory and evidence. Journal of Economic Perspectives, 25-46.

Jensen, M., & Scholes, M. (1972). The capital asset pricing model: Some empirical tests.

Paulsson, J. (2013). The Paragon Corporation: Exploring Corporate Responsibility and Shared Value for Profitability.

Securitization of Paragon group of companies PLC. Available from: http://www6.paragon-group.co.uk/pgroup.nsf/securitisationMainFS [Accessed on 15th May, 2014].

Share-price-information of Paragon group of companies PLC. Available from: http://www.paragon-group.co.uk/Investors/Share-price-information [Accessed on 15th May, 2014].

Annual Report in 2013 of Paragon group of companies PLC. Available from: http://www.paragon-group.co.uk/file_source/Files/MAIN/pdf/Financial%20Reports/Annual%20Reports/Annual%20Report%202013.pdf [Accessed on 15th May, 2014].

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