Preview

The Knowledge Related to the Range of Investments Available to Individuals.

Powerful Essays
Open Document
Open Document
2512 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
The Knowledge Related to the Range of Investments Available to Individuals.
The knowledge related to the range of investments available to individuals.

Introduction

Any investments have risks, and investors have to recognize how much risks they should take on to obtain homologous profits. The investment risk is uncertainty of future return that investors may suffer the risk of profits loss or even capital loss. For instance, stock may be stuck, real estate may fall, and the company may be close down, etc. Generally, the greater the risk, the greater the potential return, or risk premium.

Expected return is the average of a probability distribution of possible returns. The excepted rate of return (ERR) is the rate of return expected on the asset or a portfolio which based on the weighted probability of all possible rates of return. Risk Premium is the difference between a rate of return and the risk free rate of return. Fair game is that a risky investment with a risk premium of zero.

Investors need to choose appropriate financial instruments according to their own investment objectives and risk performance. By analyzing the factors of risk, expected return and risk premium can judge decision-maker's risk attitude.

The concept of investment risk and the importance of risk attitude

Investor’s different attitude of risk will affect their final investment decisions. Generally, investors are divided into three types, risk averse, risk neutral and risk lover.

Risk-averse investors

The feature of risk-averse investors is to pursue the lowest risk under a certain income level. They will prefer the one with risk-free assets or speculative prospects with positive risk premiums, such as, index funds and government bonds, and therefore they will stay away from high-risk portfolios or fair games. However, they will often lose out on higher rates of return. In addition, in order to compensate the risk they faced, risk-averse investors will reduce the expected rate of return of the portfolio by a certain percentage, and the

You May Also Find These Documents Helpful

  • Satisfactory Essays

    For investors, risk comes in many forms. There's the risk of a downturn in stock prices. There's the risk that inflation will erode an asset's purchasing power. There's the risk of political instability affecting international markets, but without risk there is no rewards. Sometimes you have to take a higher risk to get a better reward. They say depending on age should be how much you should be willing to risk.…

    • 408 Words
    • 2 Pages
    Satisfactory Essays
  • Better Essays

    Risk is a fundamental component of investment (Walter, 2012) This implies that investors must always evaluate the risk factor of an investment in order to project about the potential returns. There are numerous variables that characterize the return yielded from an investment. These returns constitute the risk for each investment. This is another essential perceptive that illustrates that returns are not obtainable without some type of risk.…

    • 1529 Words
    • 5 Pages
    Better Essays
  • Good Essays

    * Risk - The potential that a chosen action or activity will lead to a loss. Investors sometimes choose to put their money in risky investments because these investments offer higher expected returns. The more risk an investment has, the higher will be its expected return.…

    • 618 Words
    • 3 Pages
    Good Essays
  • Better Essays

    Fin 419

    • 805 Words
    • 4 Pages

    The traditional risk preference behavior exhibited by financial managers the investments that would be preferred would be that of a risk-averse do the fact that has a higher return and a lower risk.…

    • 805 Words
    • 4 Pages
    Better Essays
  • Better Essays

    * The chance that an investment's actual return will be different than expected. Risk includes the possibility of losing some or all of the original investment. Different versions of risk are usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment. A high standard deviation indicates a high degree of risk.…

    • 895 Words
    • 4 Pages
    Better Essays
  • Better Essays

    The relationship between risk and rate of return is risk determines expected rates of return on every existing asset investment. The Risk-Return relationship is characterized as being a "positive" or "direct" relationship. (Importance of risk relationship , 2001). In other worlds if the risk of investing on an investment is high then the return will also be high.. Alternatively, if an investment has relatively lower levels of expected risk then the investor will get relatively lower returns. The risk and rate of return relationship effects both business managers and individual investors. The higher the chance of risk the more likely it must be compensated with higher return.…

    • 1678 Words
    • 7 Pages
    Better Essays
  • Satisfactory Essays

    ✓ Investors’ expected utility is an increasing function of return and a decreasing function of risk (risk-aversion)…

    • 380 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    “Most managers are risk-averse; for a given increase in risk, they require an increase in return” (Gitman, 2006, p. 230). As most financial managers are risk-averse, the most liked investment is Investment X. Investment X offers the boost in yield for a boost in risk.…

    • 635 Words
    • 3 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Fin370 terms wk1

    • 673 Words
    • 3 Pages

    Risk-return trade-off: risk is the analysis of the propensity for a “possible loss” or on the company’s investments verses the anticipation that the return will benefit the company (Mayo, 2012). Futhermore, the company will not take on additional risk unless the end result will be additional return. (chp4, Mayo, 2012)…

    • 673 Words
    • 3 Pages
    Satisfactory Essays
  • Powerful Essays

    Mean Variance Optimization

    • 2062 Words
    • 9 Pages

    1. All investors are risk averse; they prefer less risk to more for the same level of expected return.…

    • 2062 Words
    • 9 Pages
    Powerful Essays
  • Good Essays

    Risk – Probability that an actual return on an investment will be lower than the expected return.…

    • 413 Words
    • 2 Pages
    Good Essays
  • Powerful Essays

    Financial Planning

    • 2529 Words
    • 11 Pages

    The investments I have advised are subject to market risk. The interest rates and inflation play a profound impact on the value of your investment and debt decisions. This is a degree of risk for variance in the expected value.…

    • 2529 Words
    • 11 Pages
    Powerful Essays
  • Powerful Essays

    accounting midterm

    • 10394 Words
    • 122 Pages

    4. All else equal, when investors consider a firm’s return on equity (ROE) they consider less risk a firm that earns…

    • 10394 Words
    • 122 Pages
    Powerful Essays
  • Powerful Essays

    Investment Appraisal

    • 2080 Words
    • 9 Pages

    . The characteristic of many investments is risk and uncertainty. many organisations prefer to avoid high risk investments but may consider these investments if they believe they will receive a greater return for the increased risk ; but firms can only guess the future revenue and costs of an investment as they are so many different that make the outcome of a investment uncertain for example the economic environment.…

    • 2080 Words
    • 9 Pages
    Powerful Essays
  • Satisfactory Essays

    Chapter 1 The Investment Environment 1.1. Real Assets versus Financial Assets (Page 30)  Real Assets  Determine the productive capacity and net income of the economy  Examples: Land, buildings, machines, and knowledge used to produce goods and services  Financial Assets  Claims on real assets 1-2 1.2.Financial Assets (Page 32)  Three types: 1.…

    • 488 Words
    • 2 Pages
    Satisfactory Essays