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    Measure risk by standard deviation coefficient of variation

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    Objective: Measure risk using standard deviation and coefficient of variation.

    You work for an large investment firm and recently wrote a position article on your firm's approach to investing for the small investor, titled "Investing is for the little guy". The article now appears on your company's website. It has, interestingly enough, generated e-mailed responses from potential clients and your firm is asking you to address some of their questions for a Frequently Asked Questions (FAQ) segment that will be posted to the site soon.
    Specifically, some of the respondents have compared investing in the stock market as a no win situation and only the institutional investors can win. These respondents would like a response that further clarifies your firm's position regarding risk in light of these type of statements.

    In your response, your company has asked that you address these questions building upon the risk-return concepts you identified in the position piece you wrote for the firm.

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    Solution Preview

    What is return?
    Return is income earned on the investments.

    What is risk?

    Risk is the uncertainty that you may not earn your expected return on your investments. For example, you may expect to earn 20% on your business project every year. But your actual rate of return may be much lower.
    What is risk -return trade off?
    The risk-return trade-off requires that you accept more risk in exchange for the chance to earn a higher rate of return. If unwilling, you should expect to earn a lower return. Conservative investors, for example, are less willing to lose 10% of their investments in exchange for the chance to earn a higher rate of return. Aggressive investors, on the other hand, are willing to accept this risk in exchange for the chance to earn higher returns
    An investor who is unwilling to accept a higher degree of investment risk in exchange for a chance to earn a higher rate of return. Investment risk is the volatility of investment returns. A basic investing principle states that a higher degree of investment risk is required to earn a potential higher rate of return

    What are different types of risk?
    Ans:
    Major types of risk include:
    Investment risk. Investment risk is the chance that your investment value will fall. Standard deviation is commonly used to measure investment ...

    Solution Summary

    This helps in measuring risk using standard deviation and coefficient of variation

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