The Most Important Thing Is … Understanding Risk
The Most Important Thing Is … Understanding Risk
This chapter describes another important requirement for successful investing: understanding risk. Investing consists of exactly one thing: dealing with the future. And because none of us can know the future with certainty, risk is inescapable. Thus, dealing with risk is an essential element of investing. Investment risk comes in many forms, from falling short of one’s goal to underperformance, career risk, unconventionality, and illiquidity. This chapter explains what gives rise to the risk of loss, how risk is measured, and why risk assessment is an essential element in the investment process. It also discusses a graphic representation that shows a “capital market line” that slopes upward to the right, indicating the positive relationship between risk and return. The chapter presents views and insights from four renowned investors and investment educators.
Keywords: risk, underperformance, unconventionality, illiquidity, risk assessment, investment, capital market line, return
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