Risk-averse Investors Vs Risk-neutral Investors

Investors can be categorized into several types based on their risk preferences. Risk preference is the intention of investors of taking risks. Usually, higher returns are associated with higher risk-taking capability, while lower risks yield lower returns. Risk-averse and risk-neutral investors are categories that divide investors into two types, considering their risk-taking intentions.

Risk-averse Investors

Risk-averse investors are interested in the lowest risk securities and for them, the weight of the investments is more important than the accumulated returns. These investors would almost always choose securities that guarantee lower returns with the least amount of risks. As is obvious, the risk-averse investors consider the guarantee of returns than the rate of return from the investment. For risk-averse investors, the guarantee weighs more than any other possible outcome.

Risk-averse investors are interested in securities that have performed steadily well for a considerable period of time. As the securities that provide low yet guaranteed returns over a specified period, they are considered safe and secure to invest which attracts the risk-averse investors to invest in them.

Risk-averse investors usually invest large sums of investment in guaranteed instruments than gambling with unknown and high-return instruments. Risk-averse decision-makers are almost always the key business persons who have the authority to delegate the right task to the appropriate person so that decisions are made correctly rather than by persons who have no idea about the outcomes.

Risk-neutral Investors

Risk-neutral Investors are opposite to risk-averse investors. They are ready to take the highest amount of risk to get the best returns from the market. Risk-neutral investors do not consider what the position of security in the market is. Instead, they are interested in securities that promise the best returns within a specified period of time.

For a risk-neutral investor, the guarantee of small returns is of no use. They want the highest of returns from the markets even if the risk is too high and the investment may go to the dust. Risk neutral principle is based on guessing the outcomes rather than using statistical tools to check which security will perform the best in the market.

As the risk-neutral investment goes through high volatility, there is a chance of losing a significant amount of investment if the market goes down and the securities on which investments were made fail in the market.

A risk-neutral individual will almost always choose the assets with the best possible gains or returns without considering the possible outcomes. Risk-neutral investors can be both individuals and organizations seeking the highest return from an investment.

Updated on: 17-Sep-2021

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