10) Financial Concepts: Conclusion

Now let us review the key points of this tutorial:

  • The risk/return tradeoff is achieving a balance between the desire for the lowest possible risk and the highest possible return.
  • The higher the risk, the greater possible return.
  • One way to lower the risk of your portfolio is through diversification.
  • Dollar cost averaging is a common technique by which a fixed amount is invested on a regular schedule regardless of the price.
  • Asset allocation divides assets among major categories to balance out the risk.
  • Random walk theory says that stocks are random and unpredictable.
  • Efficient Market Hypothesis (EMH) says it is impossible to beat a market price that already incorporates and reflects all relevant information.
  • The optimal portfolio shows how rational investors will maximize their returns for the level of risk that they are comfortable with.
  • Capital Asset Pricing Model (CAPM) deals with the relationship between risk and expected return and it also serves as a model for the pricing of risky securities.