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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.
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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