Investing and Financial Markets
Mutual Funds
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Why do returns from an investment carry a risk?

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2005-11-29 17:50:54
2005-11-29 17:50:54

Well it depends on the investment you make and the inherent risks of the investment. If, for example, you invested in the stockmarket you are investing into a company. As part owner of that company (on a miniscule scale of say 0.000001%) you will be given voting rights towards how the company should be ran. If the company's performance exceeds expectations/meets expectations you can expect not only a rise in the stock's value (and thus a gain if you were to sell your stock) but also the possibility of a dividend. Conversly if a company was to return lower than expected expectations you can expect the stock to decrease in value (as its worth may be less to potential investors) and there could be the possibility a dividend would be suspended/not paid - this would lead to the value of your investment being lower than your initial input if you were to sell the stock. The risk, therefore, is that the company could fail. If you invested your money in a home the basic principles are the same. The home may rise in price due to various factors (improved neighbourhood/facilities near your home, more buyers than sellers etc.), but again may fall due to the opposite effects (neighbourhood becomes run-down/more selling than buying etc.) The vast majority of investments have some form of risk. Even investing your money in a bank (by way of a savings account) carries a small amount of risk - banks have been known to collapse and people with savings in the bank had their money returned only in part (if at all). Infact even keeping your money in dollar-bills carries risk as the value of a dollar fluctuates across the international markets and inflation will eat into the value over time.

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The two main parameters are: * Returns - Amount of returns we can expect on the investment * Safety/Risk - How risky the investment is. Generally risk and returns are directly proportional. Higher the risk on investment, higher would be the return on investment.

low risk, low returnsmedium risk, medium returnshigh risk, high returnslow risk, high returnsthe answer is LOW RISK, High RETURNS

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.

Some common questions are: # Risk profile - Chances of losing the investment # Returns on Investment # Investment Tenure # Reputation of the investment house # etc...

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.

'Starting a business is a risk, but it can create handsome returns.' 'Before investing in shares, one must look at the potential risk of such an investment.'

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.

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.

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.

A small risk of loss in an investment.

Low risk investments generally corresponds with low level returns. Two examples of low risk investments would be investment-grade corporate bonds and uninsured municipal bonds.

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!!

No. Fundemantaly returns increase with risk, they do not diminish.

No monetary investment is risk free. All investments carry some degree of risk, even government issued debt. However some investments are LESS risky than others...or the PROBABILITY of loss is lower than others.

You should do your research prior to investing to find out the historical rate of return on your prospective investment. However, past returns are no indication of future returns.

Return on investment is the amount of profit on the invested money after deducting taxes, safety of investment is the risk factor involved in the investment. Such as risk is high safety of investment is less.

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.

Return on investment is directly related to risk of investment--the riskier an investment is, the more you have to pay people for making it.

The risk of an investment can be measured by observing how volatile the return of that investment has historically been over a period of time.

Investment counselors recommend buying stocks whose returns show a negative correlation in order to minimize the risk of big losses. ANSWER: A stock whose returns tend to increase when the returns of a second stock are decreasing.

There are several determinants of investment. They include, the return on the investment, the interest rate, and the taxes charged on the returns.

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

There is an easy and common way to know whether an investment opportunity is worth the risk. The lower the risk and the higher the expected return, the better the investment.

risk is you not returning or saving return of investment is returning something that you invested


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