What are some important concepts for individual investors to consider when
What are some important concepts for individual investors to consider when evaluating the risk and returns of various investments?
Investors need to consider a number of important concepts concerning risk and return. To expect higher returns, investors must be willing to take on higher risk and accept higher volatility in returns from period to period. To mitigate the overall risk in a portfolio of higher risk securities, investors can diversify into non or negatively-correlated securities. Investors should also appreciate the different types of external risks to securities, including market risk, interest rate risk, and inflation risk. In addition, they should also recognize that actual performance is never guaranteed and that it will vary over time.
Investors should consider the following concepts when evaluating risk and return of various investments:
1. The relationship between risk and return
2. The effect of diversification on portfolio risk.
3. The difference between required, expected, and actual returns
4. The effect of time frame on risk.
5. All the different types of risk that may affect an investment.