From the course: Finance Foundations
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Why we don’t like risk
- As humans, typically we don't like risk. Now, there are counterexamples. Extreme sports people and Himalayan mountain climbers seem to seek out risk. But most humans don't like risk, particularly in their everyday lives. That's why we have such things as health insurance and life insurance. The key point is this, people typically need to be paid to get them to accept risk. I might accept more risk if you pay me more. Let's take some examples from business. For example, if you go down to your friendly neighborhood bank and invest money in a savings account that's insured in United States by the FDIC, you can expect a return of less than 1%. Why such a low return? There's low risk. If you elect to invest in a corporate bond, you can expect a return of about 4%. Why a higher return? It's more risky. It's not guaranteed by the government. If you elect to invest in a stock index fund, you can expect an average return of about 10%. Why so much higher? Because it's a lot more risky. That…
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