When making an investment in any business, it is important to understand how it works in order to safeguard hard earned money being invested. Many people who go blindly investing in any form of ‘get rich quick’ schemes finally end up losing it all. Such investments are examples of uncalculated and unworthy risks that only end up with regrets. While many people only invest in order to make quick cash, they do not understand the theories behind risks and returns. Therefore, it is important to understand that any investment is a risk and can result in either losses or returns.
The Relationship between Risk and Return
Before venturing in any investment, it is important to understand that low risk investments can only result in low returns while …show more content…
As illustrated above, investing in gambling as well as investing in government bonds is both risks because both investments are made with the aim of getting returns. Therefore, what is invested in this case becomes the risk and what is expected is the return on investment. For example, dividends on bonds or interest earned in speculating on property can be classified as returns.
The time that an investment is made is a key determinant in the relationship between the risk and expected returns. As in the case of speculation on property, time must elapse for it to gain considerable value. Therefore, investing in long-term investments provides the investor with a better potential for higher returns which are unlikely to be affected by market changes. The above illustrates that there are risks that can termed as systematic or unsystematic depending on the level of risk that an investment is associated with (Stevens, …show more content…
For example, depositing money in a savings account guarantees returns but very little compared to other forms of investments. On the other hand, investing in property offers the investor a guarantee to handsome returns. This statement means that while good returns are associated with high risks, the same risk can yield no returns and sometimes lead to total loss of investments (Van Rooij, Lusardi and Alessie, 2011).
Different investors have different preferences and are not swayed by market forces or factors while others trend very cautiously. The difference between the two is the understanding how risks can give returns or lead to losses. Therefore, the key lies in understanding the market and its dynamics as well as have the capacity to properly interpret the nature of risks associated with specific investments and returns expected from such
The Relationship between Risk and Return
Before venturing in any investment, it is important to understand that low risk investments can only result in low returns while …show more content…
As illustrated above, investing in gambling as well as investing in government bonds is both risks because both investments are made with the aim of getting returns. Therefore, what is invested in this case becomes the risk and what is expected is the return on investment. For example, dividends on bonds or interest earned in speculating on property can be classified as returns.
The time that an investment is made is a key determinant in the relationship between the risk and expected returns. As in the case of speculation on property, time must elapse for it to gain considerable value. Therefore, investing in long-term investments provides the investor with a better potential for higher returns which are unlikely to be affected by market changes. The above illustrates that there are risks that can termed as systematic or unsystematic depending on the level of risk that an investment is associated with (Stevens, …show more content…
For example, depositing money in a savings account guarantees returns but very little compared to other forms of investments. On the other hand, investing in property offers the investor a guarantee to handsome returns. This statement means that while good returns are associated with high risks, the same risk can yield no returns and sometimes lead to total loss of investments (Van Rooij, Lusardi and Alessie, 2011).
Different investors have different preferences and are not swayed by market forces or factors while others trend very cautiously. The difference between the two is the understanding how risks can give returns or lead to losses. Therefore, the key lies in understanding the market and its dynamics as well as have the capacity to properly interpret the nature of risks associated with specific investments and returns expected from such