Discuss the terms risk, return and risk preferences. Would you consider yourself to be risk-averse, risk neutral or risk seeking?
Risk & Returns-Sample Solution
Risk and Returns
Risk refers to the inability to predict an undesirable outcome from their actions. Exposing a business to risks may result in profit reduction. Viale et al. (2021) explain that risks may be classified based on the potential of occurrence, which includes speculative and pure risks, and based on measurability, such as financial and non-financial. Also, based on behavioral changes, like hypothetical and objective, or based on flexibility, like statistic and dynamic, and based on coverage, such as fundamental and particular risks. Consequently, return refers to the positive and negative changes resulting from individual or business actions like an investment. Positive investment returns constitute profits, while negative ones constitute losses. The types of returns include nominal and real.(Risks and Returns Essay-Example)
On the other hand, risk preferences refer to individuals or investors’ decisions about the kind of risks they are willing to take to achieve a specific objective (Viale et al., 2021). These individuals are classified based on the potential return values and standard deviation. They include risk-averse, risk-neutral, and risk-seeking.(Risks and Returns Essay-Example)
Risk-averse refers to fewer risks, like investors skipping investments with higher potential loss. Viale et al. (2021) observe that risk-neutral individuals do not consider the potential value or standard deviation from their actions, such as investors making investments without considering their potential profits or losses. Consequently, risk-seeking refers to putting more effort into facilitating positive outcomes even if it means losing a lot during the process, such as investors focused on higher returns despite the risk of losing more money in the process (Viale et al., 2021). Therefore, I consider myself a risk-seeking individual based on the types of risk preferences. I prefer accepting uncertainties with higher positive gains. For instance, I would prefer investing in emerging equities across companies in emerging markets. This is due to the rapid economic growth in those markets, setting the potential for higher returns.(Risks and Returns Essay-Example)
Viale, R., Filotto, U., Alemanni, B., Mousavi, S., & Edward Elgar Publishing. (2021). Financial education and risk literacy. Cheltenham, UK; Northampton, MA: Edward Elgar Publishing. https://www.worldcat.org/title/financial-education-and-risk-literacy/oclc/1201300044