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The level of risk

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › The level of risk

  • This topic has 1 reply, 2 voices, and was last updated 7 years ago by John Moffat.
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  • October 25, 2015 at 10:02 pm #278923
    Arun
    Member
    • Topics: 16
    • Replies: 26
    • ☆

    Dear Sir,

    I was reading the F9 notes and in the second chapter I came across the following paragraph under the factors which determine interest rates:

    ‘The additional return required before someone would be indifferent between investing in
    an equity share or a deposit account will differ from individual to individual, as we all have a
    different attitude to risk. Therefore the relationship between risk and return is different for
    each individual.’

    I can’t seem to understand what it means. Could you please explain it to me? An example would be helpful as well.

    Thanks,

    Arun.

    October 26, 2015 at 6:44 am #278943
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51583
    • ☆☆☆☆☆

    An investment in shares is more risky than putting money in the bank and earning interest, because if you invest in shares you are never certain what return you will get – the dividend might end up being very high or it might end up being very low.

    So people only invest in shares if they expect they will get (on average) a higher return than investing in the bank. How must extra they need for the extra risk is different between different people – some people don’t care a lot about the extra risk, but other people might be very scared of the extra risk.

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