Facts About Taking Small Risks and Reaping Large Rewards

The market is huge because investors are willing to take more risks in exchange for a higher expected return. Symmetrically, an investor wishing to improve the profitability of his or her portfolio must accept the possibility of taking more risks. Each investor is more or less “risky” these days when it comes to investing, mainly because they have an appreciation of the “optimal” risk/return balance. Risk behavior also depends on the amount to be saved. If the amount of savings is large, the investor can devote part of the total amount to risky investments. On the other hand, if the savings is low, investments with low returns are safe and preferred. In financial markets, the least risky assets are government bonds (bonds issued by governments to finance their public debt).

Volatility is an important part of risk assessment. Volatility measures changes in the price of financial securities: equities, currencies, bonds, etc. The more volatile a stock will be, the more it will be sensitive to good and bad news about the company or the markets. High volatility means that the price varies significantly and, therefore, the risk associated with the value is significant. The volatility of the share price is higher than that of bonds. But statistical studies also show that time reduces the volatility of equities. Therefore, long-term custody reduces risk. To learn more about this, view the additional details found here.

The risk premium is the difference between the yield of a government loan and the return on a riskier investment, such as a corporate bond. In other words, it is the remuneration supplement that is offered to an investor to agree to buy business bonds or shares rather than to subscribe to government bonds. The price of a corporate bond is compared by direct reference to the price of government bonds. It is always higher because the risk of default of the borrower is greater. If the investor wants to sell their bonds before the end of the term, the price they receive will be linked to changes in interest rates. If rates have risen, the bond will lose value when it is sold before maturity, as it will outperform the new bonds.