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Step 8: Riskese

returns, investors would be better served to be more concerned with the risk level of their investments. The overall concept of the risk/return relationship is that when risk increases, the expected return on the asset should also increase as a result an expected risk premium. Investors should not expect high returns on an investment if they aren’t taking a high degree of risk. If you bet on last year’s defending champions to win the World Series, your neighborhood bookie will give you much lower odds than if you bet on Major League Baseball’s cellar dweller from last season. You are obviously taking a lot more risk by putting your money on the last place team.

Solutions Risk Defined Modern finance began with the realization that risk needed to be measured and managed. In 1654, French mathematicians Blaise Pascal and Pierre de Fermat tried to predict the future outcome of a game of chance. Their questions led to Pascal’s Theory of Probability, which Blaise Pascal quantifies the numerical likelihood of future events. Pascal’s Triangle was the foundation for learning how to manage the uncertainty of future outcomes, such as investment returns. Every investment carries an expected return. The risk of an investment is quantified by the degree to which the returns of

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