“Investors who buy an asset expect to make a return over the time horizon that they will hold the asset. The actual return that they make over this holding period may be very different from the expected return, and this is where the risk comes in.”[i] A risk-free investment such as a T-Bill has a 100% probability of delivering the expected rate of return whereas an investment with risk will have a distribution of returns. (Think back to any statistics course you have had and the chart with the hump in the middle.) The distribution of returns can be described using a whole slew of fun and entertaining statistics such as the variance (standard deviation of the distribution), skewness (bias toward positive or negative returns) and kurtosis (the tendency of the price jumping in either direction.) A fatter tail means a higher probability of jumping, just like a stock broker on Black Monday.
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