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Unformatted text preview: Risk usually varies inversely with expected returns. That is, a high risk investment will often yield a much higher potential payoff than a low risk investment. This difference in value can be seen as a "reward" for buyers' willingness to take a higher risk. The "penalty" for taking a higher risk is the possibility of losing a lot of money if the investment fails. We can see this discrepancy in the high yields (and losses) in the stock market, which is relatively high risk, the moderate yields of mutual funds, which are relatively moderate risk, and the low yields of government bonds, which are relatively low risk. When a payoff is guaranteed, as with low risk investments, the payoff is usually small, and when a payoff is uncertain, as with high risk investments, the payoff is usually higher....
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This note was uploaded on 02/09/2012 for the course ECO ECO2013 taught by Professor Jominy during the Fall '08 term at Broward College.
- Fall '08