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Portfolio Investing


Risk is defined as the volatility of the returns you get on an investment: that is, the risk that the expected return on an investment will not be realised. This refers to both the timing and the amount of the return.

For example, if you invest $1,000 in a term deposit at your local bank for three months at 7%, there's very little doubt that at the end of three months you'll receive your $1,000 back with the appropriate interest payment (in this instance, $17.50 before tax). In this example, there's very little risk to either the value or timing of your return.

In contrast, if you invest $1,000 in Telecom shares for three months, there's no way of knowing how much money you'll receive back in three months time when you sell the shares. You might receive back $800, or $1,200 - no one knows for certain. The share price may increase by $17.50 in a single day, or it may take a year to increase by the same value. In this example, there's a greater risk because both the value and the timing of the return are uncertain.