LI COMPANY (HONG KONG) LTD
1. Imagine you are Bill. How would you explain to Mary the relationship between risk and return of individual stocks?
Risk and return
The model assumes that investors are risk adverse, meaning that given two assets that offer the same expected return, investors will prefer the less risky one. Thus, an investor will take on increased risk only if compensated by higher expected returns. Conversely, an investor who wants higher returns must accept more risk. The exact trade-off will differ by investor based on individual risk aversion characteristics. The implication is that a rational investor will not invest in a portfolio if a second portfolio exists with a more favourable risk-return profile – i.e., if for that level of risk an alternative portfolio exists which has better expected returns.
noted
Bond risk
Commonly called “fixed income investment,” they are basically loans or “IOUs.” Interest earned on the money you lend. The prices of bonds do more up and down, but normally not as much as stocks. Many people think of bonds as conservative investments, but the returns can have a high degree of volatility. The fluctuation of interest rates is called interest rate risk, and a downturn in the bond prices could significantly decrease the overall return of any particular bond.
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Stock risk
Represent equity in, or partial ownership of, a company. An easy way to remember the difference between stocks and bonds is: "With stocks, you own. With bonds, you loan." The price of a stock or share can move up or down, sometimes a lot. The returns of stocks from year to year can be quite volatile, but, as the graph illustrates, the returns from stocks have significantly outpaced inflation, and topped the returns f ...