Uncertainty and Expectations

The final qualification concerns the risks that exist in investment.decisions. In real life no one has a crystal ball to read the future. All investments, resting as they do on estimates of future earnings, must about future costs and payoffs. Our discussion assumed that there were no risks. But in fact almost any loan or investment has an’ element of risk. Machines break an oil well may turn out to be a dry your favorite Internet company belly up. Investments differ in their degree of risk. but no investment is completely risk-free. Investors are generally averse to holding risky assets, They would rather hold an asset that is sure to vied them 10 percent than an asset that is equally likely to yield 0 or 20 percent. Investors must therefore receive an extra return, or risk premium, to induce them to hold investments with high systematic or uninstallable risk.

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