## Measuring Risk

Investors who buy an asset expect to make a return over the time horizon that they will hold the asset. The actual return that they make over this holding period may by very different from the expected return, and this is where the _

Variance in Returns: This is a risk comes in. Consider an investor with a 1-year time measure of the squared difference horizon buying a 1-year Treasury bill (or any other

■> & ■> between the actual returns and the default-free one-year bond) with a 5% expected return. expected returns on an investment.

At the end of the 1-year holding period, the actual -

return that this investor would have on this investment will always be 5%, which is equal to the expected return. The return distribution for this investment is shown in Figure 3.1.

Figure 3. 7: Returns on a ft/sfdree investment Probability - 1

## Lessons From The Intelligent Investor

If you're like a lot of people watching the recession unfold, you have likely started to look at your finances under a microscope. Perhaps you have started saving the annual savings rate by people has started to recover a bit.

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