Include a range of risk levels in your holdings

Article Excerpt

In theory, higher-risk stocks should deliver higher returns than lower-risk stocks—otherwise, why would any investor want to invest in high-risk stocks? But, the evidence to prove or disprove the theory is mixed. Some studies point to lower-risk stocks outperforming high-risk stocks over the long run while others point to specific periods when high-risk stocks performed spectacularly well. There is an optimal time to invest in higher-risk stocks—when they are shunned by investors driving valuations to very low levels. And that normally happens when bear markets come to an end and turn into bull markets. What are risky stocks? Financial analysts apply a wide range of methods to estimate investment risk. One such method; is the so-called Capital Asset Pricing Model (“CAPM”) designed by William Sharpe, John Lintner, Jack Treynor, and Jan Mossin in the 1960s. Sharpe was later awarded a Nobel Prize. The CAPM simply states that the expected return on a financial asset is directly linked to the risk embedded in the investment…

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