John,

Excellent article and it touches on an issues with many hedge funds today. Funds usually do a great job of researching assets and idea generation for portfolios. However, when it comes time to decide what ideas will go into their portfolio and their exposure (i.e. the decision process), their investment process falls apart. The reason? Portfolio managers are making these decisions based on heuristics, rules-of-thumb, memory and instinct. The result? Positions are the appropriately sized to reflect fundamental research and the fund does not generate as much alpha as they should.

Alpha Theory has created a solution. It is the first commercially available decision process tool for money managers.Decision process tools formalize how position size is determined, so that there is a high degree of correlation between position size and idea quality. Investors can learn a lot by simply viewing our demos at https://www.alphatheory.com/demo.jsp

Best Regards,
Jon

This is an interesting topic. I have heard of this before and have thought about it. It really does make sense when you think about it critically. Most people though, think it would be the other way. People believe that if there is no risk, they will get more money back because they will not lose their money. Higher risk, though, is what creates the large amounts of money coming back to investors. If there is a business that invests my money and it creates a big return and their project was successful, I will recieve more. If they lose my money, though, I lose my money also.

Investing seems a lot like gambling. You have to take a big chance in order to receive a big return. You aren't going to make much betting $1 but betting $100 you could eventually end up winning a lot of money. Unforunately, gambling with high stakes does not always end in a good result. You must find a happy medium because high and low risk situations in order to make profit.

It is odd that this belief is so widespread that small risks yield big returns. It seems like it is now being pressed into younger generations that the bigger the risk is the bigger the return is. What no one ever talks about is that the bigger the risk also comes the possibility of a bigger loss. People need to be reminded of the flipside possibilities.

It's a funny topic. A lot of investors have a wrong thinking. In their view, they want to buy those stock which is low risk and high return. Actually, it is almost impossible. If there is a company like that, all the people are rich already. For me, I tend to buy the low return one, because safety is the important thing for me. Also, I suggest doing a research before investing.

It is extremely difficult, if not impossible to find any stock which will be low risk and high return. Choosing the right high risk stocks are what makes truly successful investors. It's all about watching trends in the market and getting out before your stock is about to take a severe drop.

I think we should separate facts and believes. We may invest in well-known companies and we hear how those companies are performing. However, we should look at their current stock market and their future operation. We should trust what numbers and stats shows us, not what we here and think about them.

This article is really good; it tells people that good investment does not mean "low risk, high return." For me, I never think about making investment to become rich, because investing is like gambling unless you are good in finance and with enough capital. Investing is the action everyone should take as secondary job that makes your capital more stable, not rely on investing as your regular job. Because you don’t know when you might be fail investment.

This article is really good; it tells people that good investment does not mean "low risk, high return." For me, I never think about making investment to become rich, because investing is like gambling unless you are good in finance and with enough capital. Investing is the action everyone should take as secondary job that makes your capital more stable, not rely on investing as your regular job. Because you don’t know when you might be fail investment.

I agree that most people believe that if they invest into stocks and mutual funds they believe in high returns but it is not alway like that. For instance right now or economy is in a recession and stocks are down and people are losing money. If you are invested into stocks do not freak out and pull all of your money out quite yet. The economy will eventually bounce back, you have to think long term when investing not short term.

I agree that high return comes with high risk, and I think most of the people know this theory. However, it is interesting that many investors think they can get high return by bearing a low risk. People are not foolish, but they are greedy. They choose to believe that someone can get high return with low risk, and in fact, they cheat on themselves.
Of course I believe that in some special cases, people can earn great profits with low risk. But I think in most case, return and risk are in positive relationship. If there are many stocks with high return and low risk, most of the investors can earn a lot in stock market. Everyone knows that this could not be happened. We should not underestimate our risk when we invest; otherwise it is easy to lose all our money.

As a younger adult I would say that I will invest in high risk more than low risk. I am willing to take the chances for the higher payoff. If you are going to invest then do it BIG! I feel like bonds and really low risk low return investments are a waste. Even though you are making money I just see the fact that you could be making more. I guess that may be my downfall if I invest and get dominated by the markets. And I'm also sure that the older I get the more conservative I will get with my financials. But as I am right now I'll get in the mix and see what kinda damage I can do!

'Indeed, people tend to believe the opposite, that risk and expected return are negatively correlated.' I would like to think the majority of Americans don't actually believe this. They may over estimate the expected return on a stock or under estimate the risk based on a lack of knowledge of stocks and bonds. But its pretty clear that higher risk = high return even among elementary students.

First thing that comes to mind is penny stocks. Very high risk (you will pretty much always lose your investment) but occasionally the company's stock will rise and your return on investment will be exponential.

'Indeed, people tend to believe the opposite, that risk and expected return are negatively correlated.' I would like to think the majority of Americans don't actually believe this. They may over estimate the expected return on a stock or under estimate the risk based on a lack of knowledge of stocks and bonds. But its pretty clear that higher risk = high return even among elementary students.

First thing that comes to mind is penny stocks. Very high risk (you will pretty much always lose your investment) but occasionally the company's stock will rise and your return on investment will be exponential.