Tuesday, 2 September 2008

Risk and Return - Two Sides of the Investment Coin

Investment decisions are influenced by various motives.

Some people invest in a business to acquire control and enjoy the prestige associated with it.

Some people invest in expensive yatchs and famous villas to display their wealth.

Most investors, however, are largely guided by the pecuniary motive of earning a return on their investment.

For earning returns investors have to almost invariably bear some risk.

In general, risk and return go hand in hand.

While investors like returns they abhor risk.

Investment decisions, therefore, involve a tradeoff between risk and return.

Since risk and return are central to investment decisions, we must understand what risk and return are and how they should be measured.

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