Friday, 17 February 2012

Risk is dependent on both the nature of investments and on their market price

The risk of an investment is described by both the probability and the potential amount of loss.

The risk of an investment - the probability of an adverse outcome - is partly inherent in its very nature.

  • A dollar spent on biotechnology is a riskier investment than a dollar used to purchase utility equipment.  
  • The former has both a greater probability of loss and a greater percentage of the investment at stake.

In the financial markets, however, the connection between a marketable security and the underlying business is not as clearcut.

  • For investors in a marketable security the gain and loss associated with the various outcomes is not totally inherent in the underlying business; 
  • it also depends on the price paid, which is established by the marketplace.

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