Day 5: Risk/Return Trade-Off - “No Risk, No Reward”
It is all about Min(Risk)/Max(Return) Higher risk is associated with greater probability of higher return and lower risk with a greater probability of smaller return , as illustrated in Figure 6. Generally, the R isk /R eturn trade-off is calculated with the the aforementioned key drivers of returns in combination with Risk FMR such as STDEV, Alpha/Beta, the Treynor/Sharpe ratio, VaR/CVaR, R-squared, DCR, DER, ICR, and DCL. Let’s say we have to select either TSLA or AAPL based upon current EPS and STDEV values (Q4 2021): Table 14 : Example EPS and STDEV for TSLA and AAPL. Stock EPS $ Q3 2021 STDEV Q4 2021 TSLA 1.86 3.56 AAPL 1.3 1.54 Even though EPS(TSLA)>EPS(AAPL), your investment in TSLA would be considered much more risky than that in AAPL because STDEV(TSLA)/STDEV(AAPL)~2.3. For instance, in the...