Risk vs. Return Misperception

Risk vs. return misperception is the tendency to believe that taking more risk results in more return. In reality, if risk were always rewarded with higher returns, then achieving the returns wouldn’t be risky.
Volatility is not a surprise. Volatility is neutral; it is just a part of what the asset is. But you can turn it into risk if you mishandle it.1
- Dr. Eben Otuteye
Winners in the 2015 Brandes Institute “Call for Papers” contest—Dr. Eben Otuteye and Mohammad Siddiquee—make the case that volatility is not risk. Price volatility is an inherent characteristic of certain assets. When buying stocks or bonds or real estate, we accept that fluctuations in price are inevitable. So when prices fluctuate, we shouldn’t be surprised. Yet we often turn volatility—which is not always risk—into risk by mishandling it. How? By selling when the market is down and buying when the market is up. By acting emotionally, rather than rationally.

Risk Perceptions

How do you perceive risk? Contrary to popular belief, the relationship between risk and return is not linear. Higher risk may bring higher returns – but it may also bring big losses.

 

Risk Perceptions Brochure