Introduction to Evaluating Risk

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Investors use several formulas and tools to help them determine the amount of risk a potential investment may have.

What you will learn

  • Risks and Returns
  • Standard Deviation Reflects Investment Volatility
  • Beta Compares Investment Risk to the Market
  • Coefficient of Variation Indicates Proportionate Risk
  • Choose Investments Based on Risk Tolerance

What do you know?

Introduction to Evaluating Risk

Every investment holds some degree of risk.

Many people, when asked to evaluate investment risk, answer in fuzzy terms: "somewhat risky," "seriously risky," "not too risky at all." In the financial world, statistics are often used to compare the relative risks of different investments. Using statistics, you can measure the risk of a security. Although using statistics will not guarantee that you will choose the correct investment, they can be used as a guide.