student
Risk is a constant element in the field of finance. What is the fundamental relationship between risk and return? In your opinion, which factor plays a larger role?
The fundamental concept in finance theory is the relationship between risk and return. It is actually one of the most important concepts for investors to understand. A risk is the uncertainty that an investment will earn its expected rate of return. A return can be thought of as the return investors expect to receive on an investment. A rational investor will not seek to take more risk without the expectation of a higher return. Portfolio Theory initially developed by Harry Markowitz in early 50’s was the first theoretical attempt to quantify the relationship between risk and return, it characterizes risk as the uncertainty of returns, and uses standard statistical techniques to quantify the relationship between risk and return. These techniques include the application of statistical measures like variance and standard deviation to quantify the uncertainty of returns. Apparently the "uncertainty of returns" includes not only the possibility of loss, but also the possibility of positive surprises relative to expectations. Another important to extend the theoretical foundation distinguishing between the systematic risk inherent in investing in risky assets, which cannot be eliminated, and the unsystematic risk specific to individual firms, which can be eliminated through sufficient diversification. Looking at the broad picture, in my opinion risk plays a larger role as it has more appeal to earn higher than normal for an investor.
(Multiple, 2013)
Bibliography
Multiple. (2013, December 10). Risk and Return. Retrieved from bogleheads: http://www.bogleheads.org/wiki/Risk_and_return
The fundamental concept in finance theory is the relationship between risk and return. It is actually one of the most important concepts for investors to understand. A risk is the uncertainty that an investment will earn its expected rate of return. A return can be thought of as the return investors expect to receive on an investment. A rational investor will not seek to take more risk without the expectation of a higher return. Portfolio Theory initially developed by Harry Markowitz in early 50’s was the first theoretical attempt to quantify the relationship between risk and return, it characterizes risk as the uncertainty of returns, and uses standard statistical techniques to quantify the relationship between risk and return. These techniques include the application of statistical measures like variance and standard deviation to quantify the uncertainty of returns. Apparently the "uncertainty of returns" includes not only the possibility of loss, but also the possibility of positive surprises relative to expectations. Another important to extend the theoretical foundation distinguishing between the systematic risk inherent in investing in risky assets, which cannot be eliminated, and the unsystematic risk specific to individual firms, which can be eliminated through sufficient diversification. Looking at the broad picture, in my opinion risk plays a larger role as it has more appeal to earn higher than normal for an investor.
(Multiple, 2013)
Bibliography
Multiple. (2013, December 10). Risk and Return. Retrieved from bogleheads: http://www.bogleheads.org/wiki/Risk_and_return
Bibliography: Multiple. (2013, December 10). Risk and Return. Retrieved from bogleheads: http://www.bogleheads.org/wiki/Risk_and_return