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1. Sheger College
Department:-MSc project management.
Course: - Project Cost Accounting and Financial Management.
Group Assignment: - On Risk and Return of manufacturing
Name ID
1. Habtamu Garoma…………………………..
2. Alemayehu Mekonen……………………….
3. Saketa Taressa……………………………….
4. Fromsa lechisa……………………………….
5. Gemechu Binagde …………………………
6. Leta Jira………………………………………
7. Hawera Diruba……………………………...
8. Tegbaru Alemante………………………….
Submited to:-Meseret(Asst. Professor)
January, 2024
Addis Ababa, Ethiopia

2. 1
What is Risk and return?
The risk and return are two basic determinants of investments in shares and
bonds for adding values to an investor’s wealth. Risk can be referred to as the
chance of loss. When an asset has greater chances of loss, the asset can be
considered as a risky asset. Return is a measure resulting from the total gain or
loss experienced by the owner with respect to an asset (share/bond), over a given
period of time. Because of the complexity in understanding and handling of risk
and return, specifically in portfolio management, this paper provides brief
explanations on them with illustrations and related tables and figures. It is
believed that this paper can contribute to make the reader to understand the
relationship of returns and risk, especially in handling of shares in a portfolio to
reduce the risk with diversification effects.
Risk and Return
Return can be referred to as the measure of total gain or loss from an investment
over a given time period with respect to both changes in market value and cash
distributions. Normally, the return is said to be a percentage;

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Where E(r) = Expected return
Ct = Cash flow during period t
P t = Price at time t
P t-1 = Price at time t-1
When Ct = dividend, then
Therefore, E(r) = Dividend yield + Capital gaining.
There are various sources of risk that affect both firms and their stakeholders.
a) Firm’s specific risk, such as business risk and financial risk
b) Shareholder specific risks, such as interest rate risk, liquidity risk, and market
risk.
c) Firm and shareholder risk, such as event risk, purchasing power risk, and tax
risk.
It is also possible to indicate that there are different behavioral attitudes of
investors towards risk. They are: risk (neutral) indifferent, risk averse, and risk
seeking. The risk (neutral) indifferent investors have concern over the returns
they expect, not about the risk level they face from an asset. However, the risk
averse-investors always expect reasonable return to the risk they face from an
asset (expect an increase in return for a given increase in risk) and the risk seeking
investors have concern over how they face the risk over an asset, irrespective of
the return they can gain (potentially a decrease in return for a given increase in
risk).
Generally, most investors are risk averse, i.e., for a given increase in risk, they
accordingly acquire increase in return. Indicatively, if future returns were known
with certainty, there would be no risk. While investing, an investor often

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estimates pessimistic, most likely, and optimistic returns based on the risk
associated with the assets. In this context, probabilities are in consideration as
possible mechanism for more accurately assessing the risk involved in an asset.
The probability that an event will occur may be viewed as the percentage chance
of its occurrence. The expected (or mean) value of return in a probability
distribution is indicative of the most likely income, with respect to the event to
occur. The expected value of return with probability can be computed as:
What is Risk?
In finance, risk is the probability that actual results will differ from expected
results. In the Capital Asset Pricing Model (CAPM), risk is defined as the
volatility of returns. The concept of “risk and return” is that riskier assets should
have higher expected returns to compensate investors for the higher volatility and
increased risk.
Types of Risk
There are two main categories of risk:

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Systematic risk is the market uncertainty of an investment, meaning that it
represents external factors that impact all (or many) companies in an industry or
group. Unsystematic risk represents the asset-specific uncertainties that can affect
the performance of an investment.
Below is a list of the most important types of risk for a financial analyst to
consider when evaluating investment opportunities:
 Systematic Risk – The overall impact of the market
 Unsystematic Risk – Asset-specific or company-specific uncertainty
 Political/Regulatory Risk – The impact of political decisions and changes in
regulation
 Financial Risk – The capital structure of a company (degree of financial
leverage or debt burden)
 Interest Rate Risk – The impact of changing interest rates
 Country Risk – Uncertainties that are specific to a country
 Social Risk – The impact of changes in social norms, movements, and unrest
 Environmental Risk – Uncertainty about environmental liabilities or the
impact of changes in the environment
 Operational Risk – Uncertainty about a company’s operations, including its
supply chain and the delivery of its products or services

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 Management Risk – The impact that the decisions of a management team
have on a company
 Legal Risk – Uncertainty related to lawsuits or the freedom to operate
 Competition – The degree of competition in an industry and the impact
choices of competitors will have on a company
Risk Adjustment
Since different investments have different degrees of uncertainty or volatility,
financial analysts will “adjust” for the level of uncertainty involved. Generally
speaking, there are two common ways of adjusting: the discount rate method and
the direct cash flow m
1. Discount Rate Method
The discount rate method of risk-adjusting an investment is the most common
approach, as it’s fairly simple to use and is widely accepted by academics. The
concept is that the expected future cash flows from an investment will need to be

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discounted for the time value of money and the additional risk premium of the
investment.
2. Direct Cash Flow Method
The direct cash flow method is more challenging to perform but offers a more
detailed and more insightful analysis. In this method, an analyst will directly
adjust future cash flows by applying a certainty factor to them. The certainty
factor is an estimate of how likely it is that the cash flows will actually be received.
From there, the analyst simply has to discount the cash flows at the time value of
money in order to get the net present value (NPV) of the investment. Warren
Buffett is famous for using this approach to valuing companies.
Risk Management
There are several approaches that investors and managers of businesses can use to
manage uncertainty. Below is a breakdown of the most common risk
management strategies:
1. Diversification
Diversification is a method of reducing unsystematic (specific) risk by investing in
a number of different assets. The concept is that if one investment goes through a
specific incident that causes it to underperform, the other investments will
balance it out.
2. Hedging
Hedging is the process of eliminating uncertainty by entering into an agreement
with a counterparty. Examples include forwards, options, futures, swaps, and
other derivatives that provide a degree of certainty about what an investment can
be bought or sold for in the future. Hedging is commonly used by investors to
reduce market risk, and by business managers to manage costs or lock-in
revenues.

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3. Insurance
There is a wide range of insurance products that can be used to protect investors
and operators from catastrophic events. Examples include key person insurance,
general liability insurance, property insurance, etc. While there is an ongoing cost
to maintaining insurance, it pays off by providing certainty against certain
negative outcomes.
4. Operating Practices
There are countless operating practices that managers can use to reduce the
riskiness of their business. Examples include reviewing, analyzing, and
improving their safety practices; using outside consultants to audit operational
efficiencies; using robust financial planning methods; and diversifying the
operations of the business.
5. Deleveraging
Companies can lower the uncertainty of expected future financial performance by
reducing the amount of debt they have. Companies with lower leverage have
more flexibility and a lower risk of bankruptcy or ceasing to operate.
It’s important to point out that since risk is two-sided (meaning that unexpected
outcome can be both better and worse than expected), the above strategies may
result in lower expected returns (i.e., upside becomes limited).

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Spreads and Risk-Free Investments
The concept of uncertainty in financial investments is based on the relative risk of
an investment compared to a risk-free rate, which is a government-issued bond.
Below is an example of how the additional uncertainty or repayment translates
into more expense (higher returning) investments.

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As the chart above illustrates, there are higher expected returns (and greater
uncertainty) over time of investments based on their spread to a risk-free rate of
return.
What Is a Return?
A return, also known as a financial return, in its simplest terms, is the money
made or lost on an investment over some period of time.
A return can be expressed nominally as the change in dollar value of an
investment over time. A return can also be expressed as a percentage derived
from the ratio of profit to investment. Returns can also be presented as net results

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(after fees, taxes, and inflation) or gross returns that do not account for anything
but the price change.
Key Takeaways
 A return is the change in price of an asset, investment, or project over
time, which may be represented in terms of price change or percentage
change.
 A positive return represents a profit, while a negative return marks a loss.
 Returns are often annualized for comparison purposes, while a holding
period return calculates the gain or loss during the entire period that an
investment was held.
 The real return accounts for the effects of inflation and other external
factors, while the nominal return is only interested in price change.
 The total return for stocks includes price change as well as dividend and
interest payments.
Understanding a Return
Prudent investors know that a precise definition of return is situational and
dependent on the financial data input to measure it. An omnibus term like
“profit” could mean gross, operating, net, before tax, or after tax. An omnibus
term like “investment” could mean selected, average, or total assets.
A holding period return is an investment’s return over the time that it is owned
by a particular investor. Holding period return may be expressed nominally or as
a percentage. When expressed as a percentage, the term often used is rate of
return (RoR).
For example, the return earned during the periodic interval of a month is a
monthly return and of a year is an annual return. Often, people are interested in

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the annual return of an investment, or year-over-year (YoY) return, which
calculates the price change from today to that of the same date one year ago.
Returns over periodic intervals of different lengths can only be compared when
they have been converted to same-length intervals. It is customary to compare
returns earned during yearlong intervals. The process of converting shorter or
longer return intervals to annual returns is called annualization.
Nominal Return
A nominal return is the net profit or loss of an investment expressed in the
amount of dollars (or other applicable currency) before any adjustments for taxes,
fees, dividends, inflation, or any other influence on the amount. It can be
calculated by figuring the change in the value of the investment over a stated time
period plus any distributions minus any outlays.
Distributions received by an investor depend on the type of investment or
venture but may include dividends, interest, rents, rights, benefits, or other cash
flows received by an investor. Outlays paid by an investor depend on the type of
investment or venture but may include taxes, costs, fees, or expenditures paid by
an investor to acquire, maintain, and sell an investment.
For example, assume an investor buys $1,000 worth of publicly traded stock,
receives no distributions, pays no outlays, and sells the stock two years later for
$1,200. The nominal return in dollars is $1,200 - $1,000 = $200.
A positive return is the profit, or money made, on an investment or venture.
Likewise, a negative return represents a loss, or money lost on an investment or
venture.
Real Return

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The real rate of return is adjusted for changes in prices due to inflation or other
external factors. This method expresses the nominal rate of return in real terms,
which keeps the purchasing power of a given level of capital constant over time.
Adjusting the nominal return to compensate for factors such as inflation allows
you to determine how much of your nominal return is real return. Knowing the
real rate of return of an investment is very important before investing your
money. That’s because inflation can reduce the value as time goes on, just as taxes
also chip away at it.
Investors should also consider whether the risk involved with a certain
investment is something they can tolerate given the real rate of return. Expressing
rates of return in real values rather than nominal values, particularly during
periods of high inflation, offers a clearer picture of an investment’s value.
The total return for a stock includes both capital gains and losses and dividend
income, while the nominal return for a stock depicts only its price change.
Return Ratios
Return ratios are a subset of financial ratios that measure how effectively an
investment is being managed. They help to evaluate if the highest possible return
is being generated on an investment. In general, return ratios compare the tools
available to generate profit, such as the investment in assets or equity to net
income.
Return ratios make this comparison by dividing selected or total assets or equity
into net income. The result is a percentage of return per dollar invested that can
be used to evaluate the strength of the investment by comparing it to benchmarks
like the return ratios of similar investments, companies, industries, or markets.
For instance, return of capital (ROC) means the recovery of the original
investment.

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Return on Investment (ROI)
A percentage return is a return expressed as a percentage. It is known as the
return on investment (ROI). ROI is the return per dollar invested. ROI is
calculated by dividing the dollar return by the initial dollar investment. This ratio
is multiplied by 100 to get a percentage. Assuming a $200 return on a $1,000
investment, the percentage return or ROI is ($200 ÷ $1,000) × 100 = 20%.
Return on Equity (ROE)
Return on equity (ROE) is a profitability ratio calculated as net income divided by
average shareholder’s equity that measures how much net income is generated
per dollar of stock investment. If a company makes $10,000 in net income for the
year and the average equity capital of the company over the same time period is
$100,000, then the ROE is 10%.
Return on Assets (ROA)
Return on assets (ROA) is a profitability ratio calculated as net income divided by
average total assets that measures how much net profit is generated for each
dollar invested in assets. It determines financial leverage and whether enough is
earned from asset use to cover the cost of capital. Net income divided by average
total assets equals ROA. For example, if net income for the year is $10,000, and
total average assets for the company over the same time period is equal to
$100,000, then the ROA is $10,000 divided by $100,000, or 10%.

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How to Measure risk of a specific project?
Here are some steps to measure risk in a project:
1. Identify the risks: Start by identifying all potential risks that could affect the
project. This can be done through brainstorming sessions with project
stakeholders, team members, and experts. Document all identified risks in a risk
register.
2. Assess the probability: Determine the likelihood of each identified risk
occurring. Analyze historical data, expert opinion, or statistical methods to
estimate the probability. Assign a probability value to each risk, such as low,
medium, or high.
3. Evaluate the impact: Assess and quantify the potential impact of each risk on
the project's objectives, deliverables, timeline, cost, quality, and resources.
Consider both qualitative and quantitative factors while evaluating the impact.
Assign an impact rating to each risk, such as low, medium, or high.
4. Calculate the risk rating: Combine the probability and impact ratings to
calculate the overall risk rating for each identified risk. This can be done by
multiplying the probability and impact ratings to get a risk score or assigning a
risk rating based on pre-defined categories.
5. Prioritize risks: Arrange the identified risks in order of their risk ratings, from
high to low. Focus on addressing the high-risk items with significant potential
impact.
6. Mitigate or manage risks: Develop a risk management plan that includes
strategies to mitigate or manage the identified risks. Determine appropriate
measures to either minimize the occurrence or impact of the risks, transfer the risk
through insurance or contracts, avoid the risk, or accept the risk with contingency
plans.

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7. Monitor and review: Regularly review and reassess the identified risks
throughout the project lifecycle. Update the risk register with any new risks and
reassess the existing risks based on changes in the project environment.
Continuously monitor the effectiveness of the risk mitigation measures
implemented.
Note: - By following these steps, we can effectively measure and manage the risk
of a specific project, enabling proactively address potential issues and ensure
project success.
How to measure return of a specific project?
Here are some steps to measure risk in a project:
1. Define the objectives and goals: Clearly identify the desired outcome of the
project. Whether it's financial returns, increased efficiency, market expansion, or
customer satisfaction, be specific about what you want to achieve.
2. Set measurable metrics: Determine the key performance indicators (KPIs) that
will help you evaluate the project's success. For example, if the project aims to
increase sales, the KPI could be the increase in revenue or the number of new
customers acquired.
3. Calculate financial returns: If the project is primarily focused on financial gains,
calculate the return on investment (ROI). To do this, subtract the project's costs
from the gained benefits and divide it by the project's costs. Multiply the result by
100 to get the ROI as a percentage.
ROI = ((Benefits - Costs) / Costs) * 100
4. Consider indirect benefits: Not all returns are strictly financial. Some projects
may have indirect benefits such as improved brand reputation, employee
satisfaction, or reduced operational risks. These intangible benefits can be
measured through surveys, feedback, or qualitative analysis.

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5. Compare with initial estimates: If you had projected the returns of the project
before starting, compare the actual results with those estimates. This will provide
insights into the accuracy of your projections and help you make improvements
in future estimations.
6. Conduct a post-implementation review: After the project is completed, conduct
a review to assess the overall performance and impact. Measure the extent to
which the initial goals were achieved and evaluate whether the returns were
worth the resources and efforts invested.
Note: - Measuring the return of a specific project requires a combination of
quantitative and qualitative analysis. It's essential to adapt the measurement
approach based on the project's nature, objectives, and available data.
What are manufacturing risk and return?
Manufacturing risk and return are concepts that relate to the potential benefits
and drawbacks associated with manufacturing activities. Here's an overview of
each:
1. Manufacturing Risk:
Manufacturing risk refers to the uncertainties and potential negative outcomes
that can affect the manufacturing process or operations of a company. These risks
can arise from various sources and have the potential to impact business
performance, profitability, and overall success. Some common manufacturing
risks include:
a. Supply Chain Risk: Disruptions in the supply chain, such as material shortages,
delivery delays, or quality issues, can pose risks to manufacturing operations.

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b. Operational Risk: Challenges related to production efficiency, equipment
failure, process deviations, or human error can impact the manufacturing process
and output.
c. Market Risk: Fluctuations in demand, changes in customer preferences, or
market competition can affect the marketability of manufactured products.
d. Technological Risk: Rapid technological advancements or the introduction of
new manufacturing methods may require significant investments or render
existing technologies obsolete.
e. Regulatory and Compliance Risk: Non-compliance with industry regulations,
safety standards, or environmental requirements can result in penalties, legal
issues, or reputational damage.
f. Financial Risk: Manufacturing activities often involve substantial investments in
infrastructure, equipment, and inventory. Financial risks can arise from factors
such as cost overruns, pricing pressures, or inability to generate sufficient
revenues.
2. Manufacturing Return:
Manufacturing return refers to the potential rewards or benefits that can be
derived from manufacturing operations. While returns can vary depending on
industry, company, and market conditions, they generally encompass:
a. Revenue Generation: Manufacturing allows companies to produce goods for
sale, creating opportunities for revenue generation through product sales and
market expansion.

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b. Cost Efficiency: Effective manufacturing processes can lead to cost savings
through economies of scale, improved production efficiency, and streamlined
operations.
c. Competitive Advantage: Manufacturing capabilities can provide a competitive
edge by enabling companies to offer unique products, shorter lead times, or
higher quality compared to competitors.
d. Innovation and Product Development: Manufacturing often involves research
and development efforts that can drive innovation, leading to the creation of new
products, improved features, or enhanced functionality.
e. Long-Term Growth: Successful manufacturing operations can contribute to
long-term business growth, market share expansion, and increased profitability.
It is important to note that manufacturing risk and return are interconnected.
Companies must carefully assess and manage manufacturing risks to maximize
potential returns and ensure sustainable business growth.
How to decrease or manage risk and increase or improve returns?
Here are some key approaches:
1. Risk Assessment and Mitigation: Conduct a thorough risk assessment to
identify potential risks in your manufacturing processes, such as supply chain
disruptions, equipment failures, or quality control issues. Once identified,
develop strategies to mitigate these risks, such as diversifying suppliers,
implementing preventive maintenance programs, or enhancing quality control
measures.
2. Continuous Improvement: Implement a culture of continuous improvement
within your manufacturing operations. Encourage employees to identify and
address inefficiencies, bottlenecks, and potential risks. This can lead to process

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optimization, increased productivity, and reduced costs, ultimately improving
returns.
3. Supply Chain Management: Establish strong relationships with suppliers and
implement robust supply chain management practices. Maintain clear
communication channels, monitor supplier performance, and develop
contingency plans to address any disruptions. A resilient and efficient supply
chain can help mitigate risks and improve overall returns.
4. Technology Adoption: Embrace emerging technologies that can enhance your
manufacturing processes. Automation, data analytics, and artificial intelligence
can improve efficiency, accuracy, and decision-making. By investing in the right
technologies, you can reduce operational risks, streamline processes, and
potentially increase returns.
5. Quality Control and Assurance: Implement rigorous quality control and
assurance measures to ensure that your products meet or exceed customer
expectations. This can minimize the risk of product recalls, customer complaints,
and reputational damage while improving customer satisfaction and loyalty.
6. Market Research and Diversification: Conduct thorough market research to
identify new opportunities and potential risks. Diversify your product offerings
or target markets to reduce reliance on a single product or customer segment. A
diversified approach can help spread risks and capture new revenue streams.
7. Financial Planning and Risk Hedging: Develop robust financial planning and
risk hedging strategies. Maintain a healthy cash flow, monitor financial indicators,
and consider insurance or hedging instruments to protect against unforeseen
events or market fluctuations.

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8. Talent Management: Invest in recruiting, training, and retaining skilled
employees. A competent and engaged workforce can help identify and address
risks, drive process improvements, and contribute to overall success.
Remember, risk and return are inherently linked. While it's important to manage
risks, taking calculated risks can also lead to innovation and increased returns.
Striking the right balance and regularly reviewing your strategies will help you
navigate the dynamic manufacturing landscape effectively.
Is that possible to decrease risk and increase return in manufacturing
processes?
Yes, it is possible to decrease risk and increase return in manufacturing processes
through various strategies and approaches. Here are a few key considerations:
1. Process Optimization: By implementing lean manufacturing principles and
continuous process improvement techniques, such as Six Sigma, companies can
streamline their operations, reduce waste, and improve overall efficiency. This
leads to lower costs, increased productivity, and ultimately higher returns.
2. Quality Control: Maintaining strict quality control measures helps minimize
defects and ensures that products meet or exceed customer expectations. By
implementing robust quality management systems, conducting regular
inspections, and investing in employee training, manufacturers can reduce the
risk of defects, customer complaints, and costly recalls.
3. Supply Chain Management: Effective supply chain management plays a crucial
role in mitigating risks and maximizing returns. By establishing strong
relationships with suppliers, implementing just-in-time inventory systems, and
leveraging technology for real-time tracking and data analysis, manufacturers can

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optimize their supply chain, reduce lead times, minimize inventory carrying
costs, and improve overall operational performance.
4. Technology Adoption: Embracing advanced technologies like automation,
robotics, and data analytics can significantly enhance manufacturing processes.
Automation reduces the risk of human error, improves efficiency, and enables
faster production cycles. Data analytics can provide valuable insights for
predictive maintenance, demand forecasting, and optimizing resource allocation,
leading to reduced downtime, lower costs, and increased profitability.
5. Risk Management: Manufacturers should proactively identify and manage
potential risks that could impact their operations, such as supply chain
disruptions, regulatory changes, or market fluctuations. Developing robust risk
management strategies, including contingency plans, diversification of suppliers,
and comprehensive insurance coverage, can help mitigate these risks and protect
the company's financial performance.
6. Continuous Learning and Innovation: Encouraging a culture of continuous
learning and innovation within the organization fosters creativity, adaptability,
and the ability to stay ahead of the competition. By investing in research and
development, staying updated on industry trends, and actively seeking feedback
from customers and employees, manufacturers can identify opportunities for
improvement, develop new products or services, and drive sustainable growth.
It's important to note that the specific strategies implemented will vary depending
on the industry, company size, and other factors. Manufacturers should conduct a
thorough analysis of their operations, identify areas of improvement, and develop
a tailored approach to decrease risk and increase returns.

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Conclusion
The manufacturing industry poses a certain level of risk and return for investors.
On the risk front, the manufacturing industry is subject to various factors that
could impact its profitability. These include economic downturns, changes in
consumer preferences, intense competition, and supply chain disruptions.
Additionally, the industry may also face regulatory challenges and operational
risks such as equipment failures or quality control issues.
However, the manufacturing industry also offers potential returns for investors.
Being a crucial sector in the global economy, manufacturing companies have the
potential for high growth and profitability. The demand for manufactured goods
remains steady, and advancements in technology have led to increased
productivity and efficiency. Moreover, manufacturing businesses often benefit
from economies of scale, enabling them to generate substantial profits.
It is essential for investors to carefully assess the risk-return trade-off in the
manufacturing industry. They should conduct thorough due diligence, consider
the competitive landscape, and evaluate the company's financial performance,
market position, and management capabilities. Diversifying investments within
the industry and across other sectors can also help mitigate the potential risks
associated with the manufacturing industry.
Overall, while the manufacturing industry presents certain risks, it also offers
significant opportunities and returns for investors who are willing to navigate the
complexities of the sector.