Defining Risk and Return

Defining Risk and Return                          

Risk

It is the variability of returns from those that are expected. It means your actual return on an investment may differ substantially from your expected return.

Treasury Bills would be a risk-free security whereas the common stock would be a risky security.

Because Treasury Bills are Government owned and the Government pays these bills. But common stock depends on company to company so there is a risk in that. So the conclusion is,

“The greater the variability, the risker the security is said to be,”

Return

It is the income received on an investment plus any change in the market price divided by the beginning price.

For Example,

You buy for $100 a security that would pay $10 in cash to you and be worth $110 one year later. The Return would be

($10 + $10)/$100 = 20%