concepts - Updated Financial Concepts Tutorial...

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Updated 01/09/2006 Financial Concepts Tutorial http://www.investopedia.com/university/concepts/ Thanks very much for downloading the printable version of this tutorial. As always, we welcome any feedback or suggestions. http://www.investopedia.com/contact.aspx Table of Contents 1) Financial Concepts: Introduction 2) Financial Concepts: The Risk/Return Tradeoff 3) Financial Concepts: Diversification 4) Financial Concepts: Dollar Cost Averaging 5) Financial Concepts: Asset Allocation 6) Financial Concepts: Random Walk Theory 7) Financial Concepts: Efficient Market Hypothesis 8) Financial Concepts: Optimal Portfolio Theory 9) Financial Concepts: Capital Asset Pricing Model 10) Financial Concepts: Conclusion Introduction The world of investing can be a cold, chaotic and confusing place. In this tutorial, we'll go through some of the theories that investors have developed in an effort to explain the behavior of the market. We'll discuss concepts like dollar cost averaging and diversification, which are especially useful for individual investors. We will also plunge into some of the more arcane academic explanations. No matter what your situation is, all of these concepts are important to understand because they help to clarify the inner workings of the mysterious market. So, without further ado, here are some of the fundamental concepts of finance and investment. 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 equivalent 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 (Page 1 of 9) Copyright © 2006, Investopedia.com - All rights reserved.
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Investopedia.com – the resource for investing and personal finance education. 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. Low levels of uncertainty (low risk) are associated with low potential returns. High levels of uncertainty (high risk) are associated with high potential returns. The risk/return tradeoff is the balance between the desire for the lowest possible risk and the highest possible return. This is demonstrated graphically in the chart below. A higher standard deviation means a higher risk and higher possible return. A common misconception is that higher risk equals greater return. The risk/return tradeoff tells us that the higher risk gives us the possibility of higher returns. There are no guarantees. Just as risk means higher potential returns, it also means higher potential losses. On the lower end of the scale,
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concepts - Updated Financial Concepts Tutorial...

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