Friday, December 18, 2009

Return and Risk of a Single Asset

The concept of Time Value of money says, and it is rational too, that a dollar (or whatever currency is relevant for you) received today is more valuable than receiving it tomorrow. We still find that a lot of people postpone current receipt in favor of a future one. We often commit our funds to one or the other investment. Why do we do that? Well, of course, we are expecting our money to grow with time and for that to happen, the sacrifice of current income that we make today, should provide us some reward in the future. We call this reward, return.

We all know that future is uncertain and though we would like to see everything proceeding as per plan, things do go awry often. The last couple of years are recent testimony to this. It means therefore, that whenever we invest our money in expectation of future returns, there is always a chance that those expectations can be belied. That is what is the risk involved with any investment, that is, the fact that our actual return can differ from our expected return is the risk. If the actual return turns out to be more than expected, we celebrate and if the reverse happens, we can be found moping.

Therefore, just as we can hope to earn a positive return on our investments, we must also be willing to take a chance that they might turn out to be negative.

We can refuse to take that chance and avoid investing. The good part of that is that our money remains safe but dead. Stagnant money is the bad part. If it does not grow, there is only one thing that can happen with it: it goes on losing value. If you have $100 today and you hide them under a mattress, you will find that a year later, their actual worth will be less than a $100.

It follows that our willingness to tolerate a certain degree of risk, translates into a possibility of earning a positive return and the more risk you can bear, the more return you expect to earn. Put differently, if you have to be persuaded to take on some risk, you are going to ask for a suitable return for it. Risk and return go hand in hand.

In this post, I am focusing on how to find out the return and risk if we invest in a single asset (which, of course is not as wise as investing in more than one asset). The videos below demonstrate this simple process. The first video deals with return and the second one deals with risk.

Return of a Single Asset





Risk of a Single Asset

4 comments:

  1. Tomorrow is not certain and that is really true. The only thing we hold is today and to lessen frustration, just expect to possible results. The negative and positive.

    The value depends also on time and that is why we have to grab every opportunities to use it wisely. Invest well and manage it well.

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  2. An interesting view into different methods of helping yourself out of invest well.

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  3. Amazing blog and very interesting stuff you got here! I definitely learned a lot from reading through some of your earlier posts as well and decided to drop a comment on this one!

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