Tuesday, July 19, 2011

Definition of Risk

Investopedia defines risk as "The chance that an investment's actual return will be different than expected. Risk includes the possibility of losing some or all of the original investment. Different versions of risk are usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment. A high standard deviations indicates a high degree of risk."

It explains Volatility as "the amount of uncertainty or risk about the size of changes in a security's value."

I want to express risk and volatility as the collection of all the investors' foibles and ambitions into one price at one instance in time. Its the fear of not paying your bills on time this month. Its the dream of buying your girlfriend an engagement ring or planning your wedding day. Its the hope of sending your children to college, or retiring and being independently wealthy. Its where supply meets demand on our hopes and dreams, fears and greed. Its the accumulation of all emotions we hide from the world and ourselves. Its a point in time plotting sentiment on how the economy is expanding or contracting. Its a list of long-term & short-Term goals; Fear, greed and all other human emotions combined into one.

Even if we remove and detach our emotional states or biases from the equation it will be a focal point of society's aggregate value of the security.

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