FIN 320 Module 7 Risk and Return Discussion example

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This complete FIN 320 Module 7 discussion post explains risk and return through one investor's portfolio. A composite employee of the pet supply retailer holds most of her savings in company stock, attracted by its past returns. The post separates the risk that diversification removes from the market risk that beta measures, estimates the return the capital asset pricing model says the stock should offer, and identifies the assumption most likely to break for her, then asks classmates how they would advise her. The investor and company are composite; the sources are real.

What this page holds

A full FIN 320 Module 7 post, roughly 350 words, explaining total, diversifiable and market risk, applying beta and the capital asset pricing model to one stock, and showing why concentrated holdings carry risk that earns no extra return. Searches like "fin 320 module 7 assignment", "fin320 module 7 risk and return discussion" and "fin 320 module 7 example" land here.

The FIN 320 Module 7 example, in full

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Module Seven Discussion: Risk and Return

Re: All her savings in one stock

My example is a composite store manager at the pet supply retailer we have been analyzing. She holds about 70 percent of her retirement savings in company stock because it returned 20 percent a year for three years before falling 11 percent this year. Past returns, though, say little about the risk she is carrying now.

Her risk has two parts. Market risk comes from forces that move nearly all stocks, such as interest rates and recessions, and it cannot be diversified away. Company-specific risk comes from events at one firm, like the retailer's growing inventory and debt, and it can be nearly eliminated by holding many stocks whose specific surprises offset each other (Markowitz, 1952). Beta measures only the first. The retailer's beta of 1.15 means its shares have tended to move about 15 percent more than the market.

Using the capital asset pricing model with a 4.3 percent risk-free rate and a 5.5 percent market risk premium, the stock's required return works out to roughly 10.6 percent a year, the riskless rate plus beta multiplied by the premium (Dahlquist & Knight, 2022). That expected return compensates her only for market risk. The extra risk of holding one stock is real, but the market pays nothing for it, because anyone can avoid it by diversifying.

The assumption most likely to break for her is not beta at all. It is that her job and her savings are independent. If the retailer struggles, she could lose income and savings at the same moment, which is exactly when she would most need the savings. Employees at companies that failed have learned this painfully, because their pensions or retirement accounts were concentrated in the employer's shares. A broad index fund would keep her exposed to the market, and to the retailer as one small holding, while removing most of the company-specific risk. The model's record also suggests caution in treating any single estimate as precise (Fama & French, 2004).

My question for classmates: how would you persuade her to diversify without dismissing her confidence in the company?

What this page is doingThe post separates the two kinds of risk, applies beta and the model with numbers, and then identifies the practical risk the model leaves out. Moving from formula to the investor's actual exposure is what makes the analysis useful.
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References

Dahlquist, J., & Knight, R. (2022). Principles of finance. OpenStax. https://openstax.org/details/books/principles-finance

Fama, E. F., & French, K. R. (2004). The capital asset pricing model: Theory and evidence. Journal of Economic Perspectives, 18(3), 25-46. https://doi.org/10.1257/0895330042162430

Markowitz, H. (1952). Portfolio selection. Journal of Finance, 7(1), 77-91. https://doi.org/10.1111/j.1540-6261.1952.tb01525.x

How this FIN 320 Module 7 example is structured

The post uses one investor's situation to make the theory concrete. It opens with her holding and the reason for it, explains the two kinds of risk, applies beta and the capital asset pricing model with figures, and names the assumption that matters most for her. A question to classmates closes it.

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Pass along the FIN 320 Module 7 prompt with its rubric; a reply on risk, return, beta or diversification written to your prompt comes back within 24 to 48 hours; the first one is free. The paper above is an original model document written by our desk, not a submitted student paper and not an official Southern New Hampshire University document.

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FIN 320 Module 7 questions, answered

What is FIN 320 Module 7 usually about?

Module 7 of a principles of finance course commonly covers risk and return: measuring risk with standard deviation and beta, the benefits of diversification, the capital asset pricing model and the security market line. Discussions often ask students to apply these ideas to an investment decision.

What does beta measure?

Beta measures how much a stock's returns tend to move with the overall market. A beta of 1.0 means the stock moves with the market on average; above 1.0 means it tends to rise and fall more than the market; below 1.0 means it tends to move less. Beta captures only market risk, not risks specific to one company.

Why doesn't diversifiable risk earn a higher expected return?

Because investors can eliminate company-specific risk cheaply by holding many different stocks, the market does not reward them for bearing it. Only market risk, which cannot be diversified away, is compensated with a higher expected return in the capital asset pricing model.