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"No risk, no reward." "Higher risk, higher returns." - investbullbear

Tan KW
Publish date: Thu, 03 Dec 2015, 10:14 AM
Tan KW
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Good.

Wednesday, December 2, 2015 

 

Risk:  The probability and value of financial loss.

Specific risk:  Risk that is associated with an individual investment.

Old cliche in finance:  "no risk, no reward".

But there is absolutely no reason to think that accepting risk inherently generates financial returns.  

The reality is the opposite:  all other things being equal, higher risk causes you lower financial gain, since the costs you incur as a result of the elevated risk corrode the value of your assets.

All other things being equal between two distinct investment options, if one option has greater risk, then the organisation selling that investment must offer a higher rate of return in order to attract investors.

It is not that the higher risk causes higher returns - it is that investors demand higher returns in order to accept the higher risk.


Various models are used to understand the relationship between risk and returns:

  1. CAPM
  2. APT
  3. Value at Risk
  4. Expected Shortfall
  5. Ratings by underwriting agencies

 

Discussions
1 person likes this. Showing 2 of 2 comments

contemplator

Greatest return comes with lowest risk... It is one of the core concept of value investing...
The most important things by Howard Marks illustrate this concept in a graphical form... Interested people can read this book...

2015-12-03 10:39

calvintaneng

And God created great whales. Genesis chapter 1

The Biggest whales eat the easiest prey - Whales swim to the artic sea and just open its mouth and gulp down billions of small krills. So easy!

The Biggest Returns are by the safest and biggest Companies.

Walmart, coca cola, McDonald, gillette shaving blades, and other Big Companies selling every need for world's 7 billion repeat comsumers.

Any company in Malaysia with a world class competitive edge?

2015-12-03 10:47

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