Because whatever/whoever you are investing in is not a sure thing. If you had invested in Enron 10 years ago, it was a bad risk. If you had invested in Microsoft 25 years ago, you'd be a happy camper - the investment/risk was worth it. When you invest your money, you're in essence betting your money that the business/person will do well. The risk is spread out. The higher the risk, the more your payback should be. If you want very little risk, get a savings account or US government bonds. There is still risk, but very, very little. Your return on investment will not be great, but you aren't risking much.
It depends on your investment goals and risk apetite. If you are a high risk investor willing to take a few risks with your investment for higher returns go for Mutual funds. If you are a safe investor willing to compromise on returns for safety then go for bonds. Bonds are debt instruments and hence safe whereas mutual funds are stock market instruments and hence carry a risk.
The Sharpe Ratio is a financial benchmark used to judge how effectively an investment uses risk to get return. It's equal to (investment return - risk free return)/(standard deviation of investment returns). Standard deviation is used as a proxy for risk (but this inherently assumes that returns are normally distributed, which is not always the case). See the related link for an Excel spreadsheet that helps you calculate the Sharpe Ratio, and other limitations.
Maybe it is because of the uncertainty of the economy ( the ups and downs of the stock market)"How much importance should be given to the fact that (while the gains from the retirement of a loan can be estimated) (the returns from an investment always carry a risk?)"I sincerely apologize for getting technical with grammar but I would like to answer your question as accurately as possible. I bracketed the parts of your question because I'm not sure what you're actually asking. I will try to answer it in the two ways I can see it being asked.1) How does the retirement of a loan impact investment risk?The reduction of debt on the books of a corporation can positively impact its financial strength, thereby potentially reducing some of the risk involved in investing in that company. However, any investment, including a savings account, will always carry some element of risk.(With a savings account you can carry "opportunity" risk. By not investing in the bond or stock markets, or anything other than a savings account, you lose out on the opportunity to earn higher returns.)2) How much importance should be given to the fact that the returns from an investment always carry a risk, regardless of potentially positive factors affecting a companies balance sheet?Simply put, risk is one of the most, if not (arguably) THE most, important factors in evaluating a stock to purchase into, or sell out of, your portfolio.Through careful analysis and/or just listening to the consensus opinions of stock researchers, it's plain to see how much risk a stock has relative to the market and stocks in its peer group.What is much harder to evaluate, and what can only be answered by you, is how much risk is appropriate for YOU. There are plenty of online resources to help you determine that for yourself. Or you can seek out the help of a qualified financial professional.. Again I'm sorry for being picky with grammar. Good Luck!!
Excess Returns is the difference between what was gained on a risky investment, versus what one would have gained if they had not taken the risky investment and instead had invested in a risk-free investment. Any more they made taking the risk than they would have otherwise is considered to be a positive excess return.
Investment objectives are set to achieve the best portfolio diversification and to expose various segments of the portfolio to different levels of risk to achieve optimum returns on investments. It covers issues relating to safety, credit risk, interest rate risk, currency risk, sovereign risk, as well as liquidity and yield.
Investment tolerance is the degree of variability in investment returns that an individual is willing to withstand. Risk tolerance is an important component in investing. An individual should have a realistic understanding of his or her ability and willingness to stomach large swings in the value of his or her investments. Investors who take on too much risk may panic and sell at the wrong time.
Investment risk is determined by the investor. You need to ask the investor what risk they are prepared to take. If they wish to take no risk and want to guarantee their investment then there investment risk has been determined. Therefore it is likely their money will be invested in a building society account which mirrors their attitude to risk. If an investor is more speculative then they may wish to invest in stocks and shares, which has risk and reward depending on performance. So investment risk is determined by the investors attitude to risk.
Risk is the possibility of loss by unforseen happenings. it may be categorised as monetary and non- monetary. in financial parlance risk is the possiblity of loss in your investments made (either the capital u had invested, returns or both). return is the expected value from an investment which has a risk associated with it. for ex: investing in stock market has a equity risk involved with it. generally returns are based on risk levels. higher the risk higher the return and the vice versa
Capital budgeting entails decisions to commit present funds in long term investment in anticipation of future returns. The future is usually of long term nature spanning over five years. The amount of investment and the returns from the cannot be predicted with certainty due to certain variables like market for the product, technology, government policies, etc. The uncertainty associated with the investment and the returns is what makes decision makers to consider probabilty distributions in their estimates, hence, making capital budgeting to be considered under uncertainty and risk.
The risk-adjusted return is a measure of how much risk a fund or portfolio takes on to earn its returns, usually expressed as a number or a rating. This is often represented by the Sharpe Ratio. The more return per unit of risk, the better. The Sharpe Ratio is calculated as the difference between the mean portfolio return and the risk free rate (numerator) divided by the standard deviation of portfolio returns (denominator).