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What are the Three Categories of Risk Attitudes in Finance?
Depending on the level of risk the investors want to take, they are divided into three categories. These three categories offer a view of risk attitudes the investors are willing to pursue. Although there is no straightforward method to describe a quantity to the investments in each category, these categories are broadly divided depending on the probability of risks they entail in the long run. Here are the three categories of investors depending on the risk attitudes.
Risk-averse attitude is shown by investors who want to avoid risk. They will go for fewer returns rather than going for high returns.
As is obvious, a low-risk attitude is attached to low returns, the investors with a risk-averse attitude often forego high returns due to their risk-averse nature.
An example of risk-averse investors includes retirees who would rather invest their income in low-return government bonds to make sure they do not lose wealth in the long run.
Risk neutral attitude is shown by investors who are indifferent to the risks on their investments.
These investors do not care whether there will be a good or bad return on their investment.
Investors of the risk-neutral category invest without analysis of the investment, and it is their insight on the investment that lets them make the decision rather than any data or investment analysis.
An example of risk-neutral investors is those who invest money in stock markets without analyzing its risks.
A risk-seeking attitude is attached to investors who take the risk to achieve higher returns from their investments.
Risk-seeking behavior is different from risk-neutral behavior in the sense that the risk-seeking investors usually do the analysis and take a measured risk on their investment decisions.
Risk-seeking investors may get a very attractive return from their investments, but the risk to lose the most is also a probable outcome in the case of their investments.
It is notable that the categories mentioned above are directly related to the risks attached to investments. It is probability and the standard deviations that are related to the calculation of risks that offer an idea of the risk attitude in case of investment. Therefore, by looking at the probabilities of returns and standard deviations, one can have a good idea of whether an investment is worthwhile according to the needs of the investors.
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