Respond to each classmate 100 words or more Classmate 1 A high-risk investment is “one for which there is either a large percentage chance of loss of capital or under-performance – or a relatively h
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Respond to each classmate 100 words or more
A high-risk investment is “one for which there is either a large percentage chance of loss of capital or under-performance – or a relatively high chance of a devastating loss” (Simpson, 2021). In other words, a risky investment in assets means how much the return of investments deviates from its expected returns. If two assets are earning the same expected return, but one of the assets are riskier, then the investor should choose the less riskier asset as this option will provide fewer benefits for the investor. One of the first options on an investing app given to the investor is if they want to be a risky investor, or more conservative and safe. As discussed in text, the risk-return tradeoff highlights that the higher the risk, the higher the return. This is also an inverse relationship. A riskier asset can, sometimes, provide a greater amount of returns but can also result in a major loss. Any kind of investment is a risk, whether high or low. All business deals can be a gamble. This week, the text for this concept discusses the differences between high risk and low risk assets. “Small spreads between risky and less risky assets meant either that the world had become less risky or that investors were simply ignoring risk in search of higher returns” (Froeb et al., 2018). In order for a corporation to efficiently receive a favorable return, it needs to ensure that the managers and financial analysts are operating accurately and wisely. This is the reason why maintaining an equally weighted portfolio is imperative.
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How risky an investment in asset means how much the investment returns deviate from the expected return of the investment. The standard deviation is a statistic measure use to calculate this. If two assets are earning same expected return but one is riskier than other, then the investor should choose less risky asset over riskier asset for the investment. This is because as per the risk averse concept, many people will want to minimize the uncertainty by choosing investments/assets which have a lower risk. Individuals differ when it comes to willingness in bearing risks. Nevertheless, if two assets have a similar return, most individuals will prefer the asset that presents less risk. Also, investors sell the risky asset, driving down its price and increasing its expected return. Expected return will keep going up until investors are just indifferent between the risky stock and the less risky stock. Investors want to earn the highest return possible for a level of risk that they are willing to take. One way to adjust the riskiness of a portfolio is by varying the proportion of the risk-free asset and the risky asset. The investment opportunity set is the set of all combinations of the risky and risk-free assets, which graphs as a line when plotted as return against risk, as measured by the standard deviation. The line begins at the intercept with the minimum return and no risk of the risk-free asset, when the entire portfolio is invested in the risk-free asset, to the maximum return and risk when the entire portfolio is invested in the risky asset.