Financial Assignement

What are the three major functions of the financial manager? How are they related?

As we know, a financial manager concerns the acquisition, financing and management of asset with some overall goal in mind. From this definition we can extract the three major function of the financial manager: * Taking investment decision: this function concerns the choice of optimal size of the firm, the specific asset that should be reduced and asset that should be acquired. * Taking financing decision: in this function, the financial manager takes decision about the type of financing, financing mix and dividend policy. * Taking asset management decision: in this function, the financial manager has to manage existing asset efficiently.

The link between those three functions is easy to see: the cost of financing and managing an asset that is going to be acquired is a significant element that can influence all the different investment decision that a financial manager can take. Also, the acquisition of different asset can only be the result of a deep understanding of existing assets (asset management) combined to some financial decision (financing decision).

Q.10: How does the notion of risk and reward govern the behaviour of the financial managers?

“No pain, no gain” is an expression that can clearly illustrate the relation that exist between risk and reward. In other words, good reward (gain) will only come with risk-taking (going out of his comfort zone = pain). Applying this precept to finance, we can say that safe investment (less risky) will only offer low return because they are more predictable. In comparison to that, high-risk investment tends to give more return.

In order to have a better understanding of the situation, here is an example; the United Nation Treasury bond (considered as a safe investment) has a low rate return while a corporate bond has a high rate return. The major reason for that is that a corporation is more susceptible to go bankrupt.

In conclusion, when the risk of investing is high (= risk that they loose their money is high), investors are offered a high rate return and manager a good reward. The behaviour of the financial managers is governed by a principle called the “ risk-return trade off” (the principle that potential return rises with an increase in risk).

This graphic illustrates the risk-return tradeoff.

References

Investopedia Staff. “Financial Concepts: The Risk/Return Tradeoff.” Investopedia – Educating the World about Finance. Investopedia US, n.d. Web. 13 Feb. 2013.

Investopedia Staff. “Financial Risk.” Definition. Investopedia US, n.d. Web. 13 Feb. 2013.

Knight, Rebecca. “Risk and Reward.” Financial Times. The Financial Time Limited, 24 Oct. 2011. Web. 13 Feb. 2013.