Risk with Simple Prospects

The presence of risk means that more than one outcome is possible. A simple prospect is an investment opportunity in which a certain initial wealth is placed at risk, and there are only two possible outcomes. For the sake of simplicity, it is useful to elucidate some basic concepts using simple prospects.1

Take as an example initial wealth, W, of $100,000, and assume two possible results. With a probability p = .6, the favorable outcome will occur, leading to final wealth W1 = $150,000. Otherwise, with probability 1 - p = .4, a less favorable outcome, W2 = $80,000, will occur. We can represent the simple prospect using an event tree:

Retirement Planning For The Golden Years

Retirement Planning For The Golden Years

If mutual funds seem boring to you, there are other higher risk investment opportunities in the form of stocks. I seriously recommend studying the market carefully and completely before making the leap into stock trading but this can be quite the short-term quick profit rush that you are looking for if you am willing to risk your retirement investment for the sake of increasing your net worth. If you do choose to invest in the stock market please take the time to learn the proper procedures, the risks, and the process before diving in. If you have a financial planner and you definitely should then he or she may prove to be an exceptional resource when it comes to the practice of 'playing' the stock market.

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