The Economic Perspective: “Measuring Investment Risk”
Mary: I’m Mary Walden, with economist MW, welcoming you to the economic perspective. Today’s program looks investment risk. Mike, I’ve been hearing many ads about investing and risk. Most of the ads emphasize lower risk investments, especially during the research turmoil in the economy. But how exactly can investment risk be measured?
Mike: Summary Answer
- Risk essentially means not knowing what you will earn
- A direct measure is to look at the variability in the rate of return over a long period
- For example, say, investment 1 earns an average of 5% annually, but it bounces around year to year from high of 8% to low of 10%
- Investment 2 has average return of 3%, but varies very little from that – maybe low of 1% and high of 4%
- Most investors would consider investment 1 to be riskier
- But notice, investment 1 has higher average, which is typical of riskier investment
- Hard to find high average and low variability
- I’m MW
Mary: And I’m Mary Walden for the Economic Perspective, an NC State Extension program from the Department of Agricultural and Resource Economics.