CHAPTER 9What Is Risk?

A fundamental assumption in financial analysis is that it is “irrational” for investors to engage in risk taking if investment is not rewarded with a return that is above the risk-free rate or the fundamental time value of money. Implicit in this idea is that all investment has risk for which investors deserve compensation. However, there are different kinds of risks. There is the risk of losing all your money. There is the risk that your wealth will fall below a specified level. There is the risk that you will not be able to liquidate your investments at a time of your choosing for a reasonable price. There is the risk that the owner or manager of the asset you buy will default on his or her promises or contracts.


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