The TERM structure of risk-return tradeoff and short TERM investments

This empirical relationship between risk and short term investments in a frontier market is analyzed by examining the structure of risk-return tradeoffs and short term investments in companies listed in the Tehran Stock Exchange from 2004 to 2011. Risk can be described as quantified uncertainty because the probable expected outcomes can be quantified and mathematical probabilities assigned. The existence of uncertainty in business decisions can be attributed to various causes and this phenomenon has changed the investment decision making process. Today, investors are familiar with the concept of risk and are aware that probable investment returns are exposed to risk. Changes in investment opportunities therefore may alter the risk-return tradeoff of short term investments.

The data used in this study is a sample of the listed companies on the Tehran Stock Exchange (TSE) during 2004-2011. Since it was not possible to examine all the listed firms, the representative sample of listed firms were chosen based on the following assumptions and the firms which did not meet these criteria were removed from the sample:

1. Firms with identical fiscal year will be included in the selected sample.

2. The selected firms should have short term investment(s).

3. The selected firms should have distributed cash dividend.

Based on the above screening criteria, from 420 listed companies on TSE, 181 firms were selected as the sample. The required data were obtained from official and published statistics of the stock exchange.

Beta is a measure of the sensitivity of the expected returns of the i^th investment to the variance in the total market portfolio. It is a measure of the investment’s systematic risk, that portion of the i^th investment’s total risk that cannot be diversified. The share risks of the selected companies were calculated based on the respective beta coefficients and the relationship between the associated risk and the short term investments made by these firms were analyzed. The data were analyzed, and correlation tests and regression analysis were performed according to the related hypotheses that there is a significant and positive relationship between share risk and short term investment. The empirical results suggest that there is a positive and significant relationship between risk-return tradeoffs and short term investments.