Tuesday 2 September 2008

Risk

You cannot talk about investment returns without talking about risk because investment decisions invariably involve a trade-off between the two.

Risk refers to the possibility that the actual outcome of an investment will differ from its expected outcome.

More specifically, most investors are concerned about the actual outcome being less than the expected outcome.

The wider the range of possible outcomes, the greater the risk.


Sources of Risk

Risk emanates from several sources. The three major ones are:

1. business risk,

http://myinvestingnotes.blogspot.com/2008/09/business-risk.html

2. interest rate risk, and

http://myinvestingnotes.blogspot.com/2008/09/interest-rate-risk.html

3. market risk.

http://myinvestingnotes.blogspot.com/2008/09/market-risk.html


Types of Risk

Modern Portfolio Theory looks at risk from a different perspective. It divides total risk as follows:

Total risk = Unique risk + Market risk

http://myinvestingnotes.blogspot.com/2008/09/types-of-risk-total-risk-unique-risk.html

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