By Al Emid  

Toronto – Canada

 

 

 

 

Al Emid has worked in communicating ideas and concepts since beginning his career at an educational television network in 1967.  He is the co-author and author of several financial books, most recently The Emid Report on Volatility 2019 available on all major book sites.

 

 

 

 

 

Chapter 8

Risk:  How It Works and What It means to Your Investments

 

 

An investor’s comfort level with his or her portfolio would likely increase if two perspectives on risk permeate decision making.  I consider both of these absolutely central in today’s investment climate.  They should be considered before any decisions about American equities, Canadian equities, European and frontier markets equities.  These concepts were always important, but they are exceptionally important now for two reasons: the outlook for continued market volatility and our unclear position in the economic cycle, since the current bull market has extended for longer than many believed. 

 

The risk-reward ratio stripped of its complexities teaches that risk and reward in an investment run roughly in parallel.  In theory, the greater the potential for reward in an investment, such as a high-flying initial public offering (important at this time) the greater the potential for risk.  The lower the potential for reward in an investment – such as a bank certificate or government bond – the lower the potential for reward.

 

In practice, an investor can use the ratio to compare the projected yield of an investment with the amount of risk involved to achieve the yield.  A projected yield of (say) 15% would generally involve a level of risk that might make some investors nervous.  Some professional traders use this calculation as one means of deciding whether to select a specific equity.  The ratio can be calculated by dividing the number of dollars a trader will lose if the asset becomes a loser by the number of dollars in gains the trader expects if the stock works out.  A ratio of 1:2 indicates an investment that could potentially yield two units of return for one unit of risk.

 

In another edition I will discuss risk tolerance, the other perspective.

 

 





Comments are closed.

 

 


hey