Essay Title: 

Investmant Risk

April 3, 2016 | Author: | Posted in finance, mathematics and economics

Investment Risk



Investment Risk

Supposed one owned a portfolio consisting of 250 ,000 worth of long-term government bonds , would the portfolio be riskless ? Risk is defined as the probability that some favorable or unfavorable event will occur . Risk in investments is usually related to the chance that an unfavorable event will occur that will reduce the amount of one ‘s investment . U .S . government bonds are not completely riskless Although the risk with a portfolio of government bonds is less risky than other types of portfolios such [banner_entry_middle]

as long-term corporate bonds there is still some level of risk with long-term government bonds . The best way to assess the risk on long-term government bonds is to evaluate the standard deviation of the portfolio . The smaller the deviation , the smaller the risk involved (p175 . Long-term government bonds carry a standard deviation of 9 .4 with an average return of 5 .7 (p180 . These numbers indicate that in any given year , the rate of return varies from the 5 .7 average by positive or negative deviation of 9 .4 Essentially , the rate of return could conceivable be a negative 4 .3 where one would lose money . Therefore , long-term government bonds do carry a lower level of risk compared to other portfolios , but should not be considered riskless

If one had a 250 ,000 portfolio of 30-day Treasury bills (T-bills ) and every 30 days the bills matured and the principle was reinvested in a new batch of bills and the investor lives on the investment income for a constant standard of living , is this a riskless investment ? T-bills are not truly riskless when contained in a rolling portfolio . If one invested in a single one year T-bill , regardless of economy , the standard deviation is zero . Yet , when a portfolio becomes a rolling pro , the investment income will vary depending on what happens to the level of interest rates for each monthly period in this scenario In a rolling T-bill portfolio , the standard deviation is 3 .2 with an average return of 3 .9 (p .180 . Therefore , stand alone T-bills can be considered riskless , but rolling T-bill portfolios will carry a very small risk of deviating investment income from rollover to rollover



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