Will you please explain in detail the relationship between risk tolerance levels and macroeconomic variables?
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Will you please explain in detail the relationship between risk tolerance levels and macroeconomic variables?
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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 stock mutual fund every year. But your actual rate of return may be much lower.
For example, the S&P 500 index averaged yearly gains of about 20% for the five years that ended in 1999. In 2000, however, the index declined more than 9%. Bonds, meanwhile, performed better than stocks for the first since 1994.
Investment risk. Investment risk is the chance that your investment value will fall. Standard deviation is commonly used to measure investment risk. It shows a stock or bond's volatility, or the tendency of its price to move up and down from its average. As standard deviation increases, so does investment risk.
Risk and Macroeconomic variables
There is a direct relationship between the risk and economic variables. Macroeconomics determines the risk situation of an economy. The various variables are:
Market risk:
Market risk is the chance that the entire market where your investment trades will fall in value. Market risk cannot be diversified. ll securities are exposed to market risk including recessions, wars, structural changes in the economy, tax law changes, even changes in consumer preferences. Market risk is sometimes used synonymously with systematic risk. There are various variables in the economy, which affect it:
Demographics
Demographic factors such as:
o population size and distribution
o age distribution
o education levels
o income levels
o ethnic origins
o religious affiliations
* Attitudes towards:
o materialism, capitalism, free enterprise
o individualism, role of family, role of government, collectivism
o role of church and religion
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