Beginners often inquire about the additional risk associated with higher return. American government issues T bills and bonds that are the most reliable securities.
These are labeled as risk-free assets because they have the lowest risk of not getting your cash back. In particular, US government has never defaulted on its bonds and bills over the entire history.
For many countries it is not uncommon to systematically default on their obligations, for example, Argentina does it every 20 years. From this perspective many economists agree that government securities are created equal.
Makret risk is often calculated as the difference between expected and actual returns. Standard deviation is one useful measure for a stock such as Cache Inc stock. SAS or Stata provides basic commands to calculate the standard deviation from the list of stock closing prices.
It is logical to expect that higher risk will be taken by investors only if they expect higher returns. That is, higher standard deviation of Cache Inc stock indicates that bankers will get excited only if dividends are higher than on government bonds. Higher risk does not only mean high potential returns but also high potential losses as any MBA tutor could claim based on his experience.
However, it is only the expected relationship and not all bubble stocks pay more as should be clear for Facebook publicly traded stock. In general, the rate of return should increase in the standard deviation on the graph.
When subtracts the return on US bonds from some other security the difference is called risk premium. This is an additional amount that has to be offered to investment bankers for the purchase of a more risky security.
Over the long run the risk-free interest rate was about 1 per cent while the return on equity was about 7 per cent in the USA. This difference of 6 percentage points is called equity premium puzzle because it is not consistent with modern economic theory.
In particular, this difference is not confirmed by the data. In words of a famous economist, with this level of risk aversion people will not tolerate the smallest change such as taking a shower.
Of course, people differ in terms of their risk aversion and each should decide individually. Some investors are so excited about high returns that they are ready to buy junk bonds or penny stocks.
However, even an indexed security linked to S & P 500 that can pay much higher return and acceptable risk level. Indexed securities will fail to deliver high payoff only when the entire economy is going down the drain.
These are labeled as risk-free assets because they have the lowest risk of not getting your cash back. In particular, US government has never defaulted on its bonds and bills over the entire history.
For many countries it is not uncommon to systematically default on their obligations, for example, Argentina does it every 20 years. From this perspective many economists agree that government securities are created equal.
Makret risk is often calculated as the difference between expected and actual returns. Standard deviation is one useful measure for a stock such as Cache Inc stock. SAS or Stata provides basic commands to calculate the standard deviation from the list of stock closing prices.
It is logical to expect that higher risk will be taken by investors only if they expect higher returns. That is, higher standard deviation of Cache Inc stock indicates that bankers will get excited only if dividends are higher than on government bonds. Higher risk does not only mean high potential returns but also high potential losses as any MBA tutor could claim based on his experience.
However, it is only the expected relationship and not all bubble stocks pay more as should be clear for Facebook publicly traded stock. In general, the rate of return should increase in the standard deviation on the graph.
When subtracts the return on US bonds from some other security the difference is called risk premium. This is an additional amount that has to be offered to investment bankers for the purchase of a more risky security.
Over the long run the risk-free interest rate was about 1 per cent while the return on equity was about 7 per cent in the USA. This difference of 6 percentage points is called equity premium puzzle because it is not consistent with modern economic theory.
In particular, this difference is not confirmed by the data. In words of a famous economist, with this level of risk aversion people will not tolerate the smallest change such as taking a shower.
Of course, people differ in terms of their risk aversion and each should decide individually. Some investors are so excited about high returns that they are ready to buy junk bonds or penny stocks.
However, even an indexed security linked to S & P 500 that can pay much higher return and acceptable risk level. Indexed securities will fail to deliver high payoff only when the entire economy is going down the drain.
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Want to find out more about risk in C&C GROUP stock, then visit Dr Jonathan Rosental's site on how to choose the best Economics PhD Harvard for your needs.
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