Question about Risk and Capital
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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 Summary
Building upon the risk-return concepts, this solution responds to the questions furthering the firm's position regarding risk in 652 words, with one diagram and three references.
Solution Preview
Please see response attached (also below). I hope this helps and take care.
RESPONSE:
1. 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.
The Risk/Return Concept
- The relation between risk and return that usually holds in which one must be willing to accept greater risk if one wants to pursue greater returns (also called risk/reward trade-off) (1). The risk/return tradeoff could easily be called the "ability-to-sleep-at-night test." Clearly, while some people can handle the equivalent of financial skydiving without batting an eye, others are terrified to climb the financial ladder without a secure harness. Deciding what amount of risk you can take while remaining comfortable with your investments is very important. In the investing world, the dictionary definition of risk is the chance that an investment's actual return will be different than expected. Technically, this is measured in statistics by standard deviation. Risk means you have the possibility of losing some, or ...
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