risk - Updated Risk and Diversification...

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Updated 11/8/2006 Risk and Diversification http://www.investopedia.com/university/risk/ 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) Risk and Diversification: Introduction 2) Risk and Diversification: What Is Risk? 3) Risk and Diversification: Different Types Of Risk 4) Risk and Diversification: The Risk-Reward Tradeoff 5) Risk and Diversification: Diversifying Your Portfolio 6) Risk and Diversification: Conclusion Introduction With the markets moving up and down like a Six Flags roller coaster, is there anything you can do to stomach the risk ? Have you carefully considered the various risks that are associated with each investment you make? The fact is, many people either have no desire or no knowledge about how to protect themselves from unneeded risk. In this tutorial, we'll introduce you to risk and give you a good foundation to understand the relationship between return and risk. What Is Risk? Whether it is investing, driving, or just walking down the street, everyone exposes themselves to risk. Your personality and lifestyle play a big role in how much risk you are comfortably able to take on. If you invest in stocks and have trouble sleeping at night, you are probably taking on too much risk. Risk is defined as the chance that an investment's actual return will be different than expected. This includes the possibility of losing some or all of the original investment. Those of us who work hard for every penny we earn have a harder time parting (Page 1 of 6) Copyright © 2004, Investopedia.com - All rights reserved.
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Investopedia.com – the resource for investing and personal finance education. with money. Therefore, people with less disposable income tend to be, by necessity, more risk averse . On the other end of the spectrum, day traders feel if they aren't making dozens of trades a day there is a problem. These people are risk lovers . When investing in stocks, bonds, or any investment instrument, there is a lot more risk than you'd think. In the next section, we'll take a look at the different kind of risk that often threaten investors' returns. Different Types Of Risk Let's take a look at the two basic types of risk: Systematic Risk - Systematic risk influences a large number of assets. A significant political event, for example, could affect several of the assets in your portfolio. It is virtually impossible to protect yourself against this type of risk.
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