risk vs.return This is a topic that many people are looking for. thetruthaboutdow.org is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, thetruthaboutdow.org would like to introduce to you Finance Lesson 1 – Risk/Return Tradeoff. Following along are instructions in the video below:
“Everyone today s finance lesson will be on the risk return trade off the risk risk return trade off is an important concept in finance and investing and is the for many complex theories that we will look at later so on today s lesson. We will talk about risk and return individually and collectively the trade off and how it relates to bonds and lastly. We will take a look at the economy s role in the risk and return trade off to actually define the risk return trade off. We must first define risk and return.
Separately risk is the probability that an investments actual return will be different from the expected return risk can be low in other words. The chance that an investor will lose some of his investment or risk can be high in other words. The chance that an investor will lose most or all of his investments return is simply the profit on an investment..
It can be measured in absolute terms or in percentage terms. Now we can define the risk and return trade off the risk and return trade off is a proportional increase or decrease of return to an increase or decrease of risk investors generally look for an investment that will give the highest possible return for the lowest possible risk. More simply by looking at this graph we can conclude and high risk. Equals high potential returns and low res equals low potential returns.
An important thing to remember is that high risk means a higher potential return. It does not guarantee a high return in general whenever. There is a risk or the chance of return and an equal chance of loss..
Now. Let s look at a real world. Example bonds. A corporate bond has a higher risk and a higher potential return than a government bond.
Why an a company may default on its loan or shut down on the other hand. A government bond is issued by a country s government and a government can raise taxes or print. More money to redeem the bond at maturity in general a government s chances of defaulting..
A loan or shutting down is almost impossible a more in depth lesson on bonds will be covered in a later video. Economic conditions also dictate the amount of risk and investors willing to take on if the economy is in recession or if unemployment is high investors will be less inclined to purchase risky securities and will thus expect lower returns during that trading season. For example during the recession of 2008 mark zuckerberg. Lost 600 million dollars and bill gates lost 18 billion.
Dollars. The market crash. The recession and increasing levels of unemployment resulted in a bear market in rich investors with targeted low risk and low yield securities..
Now to summarize the risk and return trade off is a valuable concept that is used in many investing strategies as well as vital corporate finance decisions in future lessons. We will be referring to the risk return trade off as it will allow us to look into other concepts. More deeply now that wraps up the lesson for today. If you have any questions or concerns.
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