Chapter 2. Weighing Risk and Return
The two most fundamental concepts in investing are risk and return. It's difficult to achieve any degree of success with your investments without a firm grasp of these two notions. What are risk and return? What do they mean? How do you measure them? And how do they interact with each other? In Chapter 2, we present answers to these questions, and help get you comfortable with these two critical facets of investing.
Return is the good stuff. Everybody wants an appetizing return. It's like the delectable flavor in an excellent dish. Risk is the bad stuff — the nasty saturated fat in the recipe. But, alas, the best-tasting foods also tend to contain the most nasty stuff. That's the trade-off — in cooking, and in investing. You have to take the bad with the good. The art (really, the science) is in striking the right balance. Whenever you invest, the challenge is to find the most profitable balance of risk and return.
In this chapter, we take a close look at return and the various ways to measure it. It's easy to get confused by all the different types of returns you may see published daily in the stock tables of newspapers and financial Web sites, but we'll help you see through the clutter. We also examine risk, a much less intuitive concept, but one that actually holds the key for unlocking successful investing. In essence, risk is subjective, ...
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