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Unformatted text preview: measures the return volatility and
units are in percentage.
(26) Std.dev.(r ) variance(r ) V Using the standard deviation on the yearly returns as measure of risk it becomes clear that U.S. Treasury
bills were the least variable security, whereas common stock were the most variable. This insight
highlights the risk-return tradeoff, which is key to the understanding of how financial assets are priced.
Investors will not take on additional risk unless they expect to be compensated with
additional return The risk-return tradeoff relates the expected return of an investment to its risk. Low levels of uncertainty
(low risk) are associated with low expected returns, whereas high levels of uncertainty (high risk) are
associated with high expected returns.
It follows from the risk-return tradeoff that rational investors will when choosing between two assets that
offer the same expected return prefer the less risky one. Thus, an investor will take on increased risk only
if compensated by higher e...
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- Spring '12