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
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