This preview shows page 1-2-3-4-5-6 out of 18 pages.

Save
View full document
View full document
Premium Document
Do you want full access? Go Premium and unlock all 18 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 18 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 18 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 18 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 18 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 18 pages.
Access to all documents
Download any document
Ad free experience
Premium Document
Do you want full access? Go Premium and unlock all 18 pages.
Access to all documents
Download any document
Ad free experience

Unformatted text preview:

Chalk Talk | Investing Basics | Analyst | Technical Analy | Fundamental Analy | Options/Futures | Trading | Mutual Funds | RetiremLearn how to Make Money in Today's Market! Dictionary Dictionary Term of the Day Buzz Words Tutorials Learn the Basics More Advanced Active Trading Articles Investing Basics Stocks Active Trading Retirement Mutual Funds Options & Futures Ask Us Exams CFA (I, II, III) Series 7 Series 6 Investing Game Open an Account Goto Your Portfolio Tools Calculators Free Trading Kits ChartAdvisor Newsletters Sign Up Corporate Advertising Licensing Contact Us Investment Strategies for the 21st Century: Assessing The RisFrank Armstrong, CFP Printer friendly version"Risk" is the investor's four-letter word. Everybody is risk-averse. We all would prefer a certain, or risklresult. It's rational and normal to be concerned about investment risk. But at some point, normal concebecomes irrational fear. And that exaggerated fear keeps too many people from making appropriate invchoices. Investment risk can be an extraordinary stress for many. I have seen investors throw up when the valutheir portfolio dropped by 5%. Others worry themselves sick slowly, over a long period of time. In a socjudges happiness, security, power and prestige by the number of zeros in a bank account, perhaps thatshouldn't surprise us. Money takes on a sacred aura, and a threat to wealth, even temporary, seems lifthreatening. Risk aversion is not a matter of personal courage or "manliness." I know hundreds of combat-tested figpilots, infantry officers, and tank commanders who cannot make themselves leave their comfortable, "sCDs. I believe in many cases, risk aversion is a fear of the unknown, a feeling of being out of control, oknowing how bad things might get. Without solid information on the "threat," risk becomes a Bogey Matall! The conventional wisdom - that the stock somehow treacherous and dangerous - cecontributes to the problem. As we have seconventional wisdom is often wrong. In fachave been a highly reliable engine of weallong-term investors. In this chapter, we wdemonstrate that market risk is almost exclusively a short-term phenomenon which falls over time, andbeing part of the market may be one of the biggest risks of all. Even investors who are comfortable with risk will benefit from a better understanding of what it is, whecomes from, how it is measured, and how it can be managed. Later we will use this information to cons"efficient" portfolios to meet your individual needs. "Efficient" means that either we will obtain the maxiamount of return for any level of risk we choose to bear, or meet our rate of return objective with the leamount of risk. A World Without Risk Just for a second let's try to imagine an investment world where there was only one dimension: rate ofInvestment choices might look like this: Investor Solutions, Inc.Like what you're reading? Put it into action. Qualified investors can get a complimentary professional analysis by Frank Armstrong and a proposal tailored to your exact needs.Click Here To Get Started!Page 1 of 18Investment Strategies for the 21st Century: Assessing The Risk4/7/2004http://www.investopedia.com/articles/investment_strategies/chapter2.aspAll returns are certain. Investors would, of course, decide that more is better. Everyone would want invA. No one would consider investment B. Investment B would cease to exist as a choice for lack of takerEveryone would get the same investment result, and no one could aspire to a higher rate of return. Risk Offers the Chance for Higher Returns Now let's imagine a second dimension. Investment choices might look like this. Page 2 of 18Investment Strategies for the 21st Century: Assessing The Risk4/7/2004http://www.investopedia.com/articles/investment_strategies/chapter2.aspInvestment B offers a known outcome. Investment A introduces an amount of uncertainty. The results variable. The Investor's Dilemma True choice now exists. Investors face a dilemma. They prefer a certain result. However, they also wanhigher returns offered by investment A. They are trapped between wanting a certain result, and wantinSome investors will opt for the known result, and some will decide to go for the higher rate of return. Risk is, of course, the primary concern of investors. Acceptance of risk is what separates our "savings" "investments." The successful investor must come to terms with the implications of accepting risk. He kcannot have it both ways. He cannot hope for higher returns without accepting the fluctuation. And he mrealize that all fluctuations are not positive. Not every day will be uniformly wonderful. He must be honehimself about his tolerance for risk, and resist the temptation to second-guess himself when the inevitaday arrives. Bad days are built right into the investment strategy. As we shall see, there should be mangood days than bad, and we will make more during the good days than we will lose during the bad. Butmakes no sense to pretend that the bad days aren't going to come. Investors who pretend that they are somehow exempt from risk set themselves up for disaster. One of worst things an investor can do is accept a risk with the expectation that his investments will only go stup. Markets do not work that way. And an investor who doesn't understand that will fall prey to the buysell-low, vicious downward spiral syndrome. The time to fully understand your risk tolerance and the risks in your investment portfolio is before youyour investments! In economic theory, at least, we all have many different combinations of risk and reward that we wouldequally attractive. If we were to plot all those combinations, the resulting line would be called our indiffcurve. We will have to examine the concept of indifference curves once more in relation to Modern PortfTheory. Since I have never found a real, live investor who has plotted his indifference curve, we won't smuch time on it. I must confess that I have no idea what mine would look like. The amount of additional return which must be offered to an investor in order to pry him away from hisresult is called the "risk premium." The speculation that investors often change their risk premiums as aof recent events goes a long way toward explaining market excesses and the lemming-like behavior of investors. The Professional's View Stock market returns can be described as random distributions with a strong upward bias. Over a long time, returns in


View Full Document

UCLA STAT 11 - chap

Download chap
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view chap and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view chap 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?