Question

1.Explain the four moments with respect to investing and specifically, to risk-return. How does this link to normality assumptions? What information does each contain?

Answer 1

Investing is putting money into Financial securities, Property, Commercial ventures and other instruments expecting it to give you good returns in future and simple terms Investing is to "Grow your capital".

Investing :Risk and return

Understanding the Risk and return before investing is really important because growth is not Uni-directional it can go up and down basically reacting to Macro, Micro variables and also to market sentiments and many other stuffs so sceneraio becomes uncertain to predict whats going to happen in future so it bbecomes important to know what sthe return an risk, basically Return tells us how much did your invest grow in the last 3 months , 6 months and so on and the risk tells us how volatile is your investment is the volatility 5%, 10%,15% ( Basically using the Standard deviation of historical investmenst returns ( Catogorizing it by assets makes it more reliable and meaningful) for example fixed income securities like bonds, notes, Bills and FD's and so on are less volitile where as Stocks are highly volatile.

One has to understand the Trade between Risk and return before invetsing to get the maximum benefit based on the investors Profile, Capital , Risk Appetite, Time horizon, Income requirement and so on.

Since the Security prices are Log Normally distributed and extreme movements becomes less likely as and when they approach Zero so that is why they are Normally distributed .