Risk Factor/Expectation Value Definition

When it comes to investments, risk and expected returns are two important factors to consider. But what do these terms mean?

Risk is the chance that an investment will lose money. The higher the risk, the greater the chance of losses. Expected return is the average amount of money an investment is expected to earn over time. It includes both the potential ups and downs of the investment.

To calculate risk, investors use a metric called standard deviation. This measures how much an investment’s return varies from its average return over time. The higher the standard deviation, the higher the risk. To calculate expected return, investors use a metric called expected value. This measures how much an investment is expected to earn on average over time.

Investors typically seek investments with high expected returns and low risks. However, there is no guarantee that any investment will perform as expected. Past performance is not necessarily indicative of future results.