Understanding Investment Risk and Reward


The Small Investor

An important concept to
understand in investing is risk and return, often expressed as a
risk/reward ratio.  The basic idea is that the risk/reward ratio
should be about the same for any investment.  If an investor is
taking more risk, he should expect to have the chance to get a
greater return on his investment.

For example, a bank
account is a fairly risk-free investment.  Because losses in banks is
very rare — even rarer since the Government began insuring bank
accounts and requiring that banks hold a certain amount of capital in
reserve — the amount of return from a bank account is fairly low.
Bank investors do not expect a large return from their bank accounts
as long as they can reasonably expect to be able to get the money
back when they need it.  The return is actually a little worse than
inflation in fact, so wise…

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