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Word Count: 1,756
The principles of risk and return Fundamentally the greater the return the greater the risk in other words there is a direct relationship between risk and return An investor acting in rational self interest would only invest in a speculative investment if the investor is compensated by a greater return For instance gambling has the greatest risk attached and also it potentially has the greatest return However government bonds have little to nil risk - in OECD country - but it also has the least return In terms of securities low capital shares or speculative shares are risk orientated This risk is due to the shares only needing to shift small amounts in worth to create large percentage gains or losses Blue chip shares are renowned for being risk adverse thus profits are reduced When the fundamental theory of return and risk is applied to the three investors given different amounts of risk are taken Cathy who is young reasonably affluent and has minimal liabilities could be defined as a High-Roller High-rollers are people who believe money means infinite possibilities Thrill seekers who enjoy financial risk but are only mildly interested in where it takes then Money brings instant power and recognition Fred who is young below average wage and has family and mortgage could be defined as a Money Master Money Master is a person who balances their finances with the degree of contentment and security they derive from their money Leading wealth accumulators even though they dont necessarily earn the most Jim and Joan who are nearing retirement average wage and has house as liabilities could be defined as Safety Players Safety Players are people who are the lowest in self determination Average earners Most of their money goes into safe and secure investments Aims of Investment Essentially there are three main principles in investment Maximise income on the asset through interest rents and dividends Capital gain due to assets value
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