4. Measures of Risk

Question 1

What is Risk-Expected Return Trade-Off?

Answer 1

Risk-Expected Return Trade-Off?

Most investors are willing to sacrifice some potential return if they can thereby obtain a sufficiently large reduction in risk.

Question 2

What does it mean to be “risk averse?”

Answer 2

Risk averse?

Risk averse means, among other things, choosing the less risky alternative from investments with equal expected returns.

Question 3

How does one measure the riskiness of a distribution?

Answer 3

Measuring Riskiness of a Distribution?

1. Variance – σ² (signma squared)
2. Standard Deviation – σ (sigma)
3. Coefficient of Variation (CV)

Question 4

What is Variance and its formula?

Answer 4

Variance – (σ²) the most general measure of risk, variance is a measure of uncertainty or risk based on squaring the difference between each return and the mean return.