Risk vs Return Tradeoff

In the investing world, the dictionary definition of risk is the chance that an investment’s actual return will be different than expected. Technically, this is measured in statistics by standard deviation. Risk means you have the possibility of losing some, or even all, of our original investment.

Low levels of uncertainty (low risk) are associated with low potential returns. High levels of uncertainty (high risk) are associated with high potential returns. The risk/return tradeoff is the balance between the desire for the lowest possible risk and the highest possible return. This is demonstrated graphically in the chart below. A higher standard deviation means a higher risk and higher possible return.

A common misconception is that higher risk equals greater return. The risk/return tradeoff tells us that the higher risk gives us the possibility of higher returns. There are no guarantees. Just as risk means higher potential returns, it also means higher potential losses.

On the lower end of the scale, the risk-free rate of return is represented by the return on U.S. Government Securities because their chance of default is next to nothing. If the risk-free rate is currently 6%, this means, with virtually no risk, we can earn 6% per year on our money.

The common question arises: who wants to earn 6% when index funds average 12% per year over the long run? The answer to this is that even the entire market (represented by the index fund) carries risk. The return on index funds is not 12% every year, but rather -5% one year, 25% the next year, and so on. An investor still faces substantially greater risk and volatility to get an overall return that is higher than a predictable government security. We call this additional return the risk premium, which in this case is 6% (12% – 6%).

Determining what risk level is most appropriate for you isn’t an easy question to answer. Risk tolerance differs from person to person. Your decision will depend on your goals, income and personal situation, among other factors.

Reference: http://www.investopedia.com/university/concepts/concepts1.asp#axzz1giDcOnzS

Career perspectives

Progression rates and routes vary according to the type of employer. In large organisations there may be greater opportunities, with scope for development internally, e.g. into management roles.

A typical career path in a large financial institution might be:

•credit risk analyst;
•senior credit risk analyst;
•risk manager;
•senior manager/managing director.
Risk is a growing area with very good career prospects. Risk consultancies offer employees the opportunity to move into the lucrative area of consultancy and many offer graduate programmes in risk management.

Opportunities also exist to move from risk into more general finance roles.

Corporate governance initiatives and a more restrictive and expensive insurance market have given risk analysts a higher profile within organisations. The importance of the role of risk professionals is increasingly being recognised, with risk managers gaining places at senior management level and as board members.

You may find that, in order to progress, you will need to move between organisations. Many professionals will change organisation within three to five years of joining. You may also need to gain additional professional qualifications for career progression with some employers.

Find more at

Reference: http://www.prospects.ac.uk/financial_risk_analyst_career_development.htm