Thursday, 23 May 2013

Risk aversion

A description of an investor who, when faced with two investments with a similar expected return (but different risks), will prefer the one with the lower risk.

A risk-averse investor dislikes risk, and therefore will stay away from adding high-risk stocks or investments to their portfolio and in turn will often lose out on higher rates of return. Investors looking for "safer" investments will generally stick to index funds and government bonds, which generally have lower returns.

Are our banks heading in this direction and is it good news?

Banks today are being told to risk less, save more, because of the financial crisis of 2008, and because today's view is that banks should not be like casinos. So will banks go back to investing in only government bonds? I doubt it.

The basic idea of a bank is to take in deposits, keep some as cash and use the rest to earn for the bank. The model is still sound, what needs to happen and is not happening is the control of people and not the banks. The people employed are the ones that need to be managed in the future in a way that allows banks to continue, and that is up to law makers, the government. I have seen no action in this direction so far and that needs to change.

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