Risk and return are inseparable within financial markets. While there may be safer and less risky investment options available, risk is ever present. Often, the greater the risk, the larger the return on an investment. The return may be a result of normal fluctuations in the trade market or a result of market imbalances. When the market becomes unstable, however temporarily, economic forces often will drive it back toward stability, though at times the market may need interventionary policies. During such periods, investors hoping to capitalize on market movements can experience either gains or losses—sometimes significant ones. To reduce the risk of loss and encourage gain, investors must be able to measure and interpret risk.
At A Glance
Alpha returns are associated with the normal fluctuations of the securities market.
Beta returns are derived from temporary fluctuations in the market.
- Beta returns give investors the opportunity to make large sums of money, but investors can also lose a great deal.
Beta returns can be calculated using a set of data points.
- Beta returns are the driving forces behind much of the investment market.
- Risk can be measured against return expectation or loss tolerance using standard deviation and the r-squared measure can be used to measure variance.
- The greatest predictor of return is market risk.