Tag Archive: Risk premium


The risk/return tradeoff could easily be called the “ability-to-sleep-at-night test.” While some people can handle the equivalent of financial 813530skydiving without batting an eye, others are terrified to climb the financial ladder without a secure harness. Deciding what amount of risk you can take while remaining comfortable with your investments is very important.

In the investing world, the dictionary definition of risk is the chance that an investment’s actual return will be different from expected. Technically, this is measured in statistics by standard deviation. Risk means you have the possibility of losing some or even all of our original investment.   Continue reading

Pronounced as though it were spelled cap-m, this model was originally developed in 1952 by Harry Markowitz and fine-imagestuned over a decade later by others, including William Sharpe. CAPM describes the relationship between risk and expected return, and it serves as a model for the pricing of risky securities. CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium. If this expected return does not meet or beat our required return, the investment should not be undertaken.

The commonly used formula to describe the CAPM relationship is as follows:
Required (or expected) Return = RF Rate + (Market Return – RF Rate)*Beta Continue reading

The Risk/Return Tradeoff

The risk/return tradeoff could easily be called the “ability-to-sleep-at-night test.” While some people can handle the imagesequivalent of financial skydiving without batting an eye, others are terrified to climb the financial ladder without a secure harness. Deciding what amount of risk you can take while remaining comfortable with your investments is very important.

In the investing world, the dictionary definition of risk is the chance that an investment’s actual return will be different than expected. Technically, this is measured in statistics by standard deviation. Risk means you have the possibility of losing some or even all of our original investment. 
Continue reading

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