the E-Investments Exercises on page 187. ( Book: Investments / Edition: 9th / Au
ID: 2654529 • Letter: T
Question
the E-Investments Exercises on page 187.
( Book: Investments / Edition: 9th /
Author(s): Bodie, Zvi; Kane, Alex; Marcus, Alan /
ISBN13: 9780073530703 / Pub. Date: 9/17/2010 )
Risk Aversion
There is a difference between an investor’s willingness to take risk and his or her ability to take risk. Take the quizzes offered at the Web sites below and compare the results. If they are significantly different, which one would you use to determine an investment strategy?
http://mutualfunds.about.com/library/personalitytests/blrisktolerance.htm
http://mutualfunds.about.com/library/personalitytests/blriskcapacity.htm
Explanation / Answer
1. Willingness to Take Risk : This depends on our inherent nature, our attitude towards life, finance domain , Knowledge of financial products etc. Our whole upbringing will contribute towards this, because our willingness to take risk will depend on our inherent self , who we are from inside . So you can either be extra cautious by nature and may not be willing to take risks or you can be a big risk taker who is willing to sell his pants and bet money on anything. This is answer to “Can you take risk ?”
2. Ability to Take Risk : This is the next Important part in Risk taking. Does your situation allow you to take risk or not ? It has nothing to do with your willingness to take risk , you can be very much a risk taker and dieing to bet on the next multibagger or invest in that 100% return a year mutual fund , but you have to consider a worst case at the end. You have to visualize the worst case as if it has happened after you take that risky decision . This is answer to “Shall you take the risk ? “
. So Risk is composed of two parts . Probability of Event occurring should be the secondary thing one should look at and Impact of event occurring should be primary. See the picture below to understand it visually .
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