A) Select the correct answer from the options given
the sentences :
.... shares for
(1) The investors who are ready to take risk prefer
investment.
equity
(c) bonus
Answers
Answer:
Low-Risk vs. High-Risk Investments: An Overview
Risk is absolutely fundamental to investing; no discussion of returns or performance is meaningful without at least some mention of the risk involved. The trouble for new investors, though, is figuring out just where risk really lies and what the differences are between low risk and high risk.
Given how fundamental risk is to investments, many new investors assume that it is a well-defined and quantifiable idea. Unfortunately, it is not. Bizarre as it may sound, there is still no real agreement on what “risk” means or how it should be measured.
Academics have often tried to use volatility as a proxy for risk. To a certain extent, this makes perfect sense. Volatility is a measure of how much a given number can vary over time. The wider the range of possibilities, the more likely some of those possibilities will be bad. Better yet, volatility is relatively easy to measure.
Unfortunately, volatility is flawed as a measure of risk. While it is true that a more volatile stock or bond exposes the owner to a wider range of possible outcomes, it does not necessarily affect the likelihood of those outcomes. In many respects, volatility is more like the turbulence a passenger experiences on an airplane—unpleasant, perhaps, but not really bearing much of a relationship to the likelihood of a crash.
A better way to think of risk is as the possibility or probability of an asset experiencing a permanent loss of value or below-expectation performance. If an investor buys an asset expecting a 10% return, the likelihood that the return will be below 10% is the risk of that investment. What this also means is that underperformance relative to an index is not necessarily risk. If an investor buys an asset with the expectation that it will return 7% and it returns 8%, the fact that the S&P 500 returned 10% is largely irrelevant.
KEY TAKEAWAYS
There are no perfect definitions or measurements of risk.
Inexperienced investors would do well to think of risk in terms of the odds that a given investment (or portfolio of investments) will fail to achieve the expected return and the magnitude by which it could miss that target.
By better understanding what risk is and where it can come from, investors can work to build portfolios that not only have a lower probability of loss but a lower maximum potential loss as well.
High-Risk Investment
A high-risk investment is one for which there is either a large percentage chance of loss of capital or under-performance—or a relatively high chance of a devastating loss. The first of these is intuitive, if subjective: If you were told there’s a 50/50 chance that your investment will earn your expected return, you may find that quite risky. If you were told that there is a 95% percent chance that the investment will not earn your expected return, almost everybody will agree that that is risky.
The second half, though, is the one that many investors neglect to consider. To illustrate it, take for example car and airplane crashes. A 2019 National Safety Council analysis told us that a person’s lifetime odds of dying from any unintentional cause have risen to one in 25—up from odds of one in 30 in 2004.1 However, the odds of dying in a car crash are only one in 102, while the odds of dying in a plane crash are minuscule: one in 205,552.2
What this means for investors is that they must consider both the likelihood and the magnitude of bad outcomes.
Low-Risk Investment
By nature, with low-risk investing, there is less at stake—either in terms of the amount of invested or the significance of the investment to the portfolio. There is also leBiotechnology stocks are notoriously risky. Between 85% and 90% of all new experimental drugs will fail, and, not surprisingly, most biotech stocks will also eventually fail. Thus, there is both a high percentage chance of underperformance (most will fail) and a large amount of potential underperformance (when biotech stocks fail, they usually lose 95 percent or more of their value).3
In comparison, a United States Treasury bond offers a very different risk profile. There is almost no chance that an investor holding a Treasury bond will fail to receive the stated interest and principal payments. Even if there were delays in payment (extremely rare in the history of the United States), investors would likely recoup a large portion of the investment.
Explanation: