232 Part 3 Financial Assets
Note also that if you had bought and held GE stock you would have done
quite well; but if you had bought GM stock, you wouldn’t have done well at all. If
you had formed a portfolio with some GM and some GE stocks, you would have
had “average” performance. The portfolio would have limited your potential gain
but also would have limited your low-end returns. We will have more to say about
portfolios later, but keep this in mind as you go through the chapter.8-2 STAND!ALONE RISK
Risk is de" ned by Webster as “a hazard; a peril; exposure to loss or injury.” Thus,
risk refers to the chance that some unfavorable event will occur. If you engage in
skydiving, you are taking a chance with your life—skydiving is risky. If you bet on
the horses, you are risking your money.
As we saw in previous chapters, individuals and " rms invest funds today with
the expectation of receiving additional funds in the future. Bonds offer relatively
low returns, but with relatively little risk—at least if you stick to Treasury and high-
grade corporate bonds. Stocks offer the chance of higher returns, but stocks are
generally riskier than bonds. If you invest in speculative stocks (or, really, any stock),
you are taking a signi" cant risk in the hope of making an appreciable return.Risk
The chance that some
unfavorable event will
occur.Risk
The chance that some
unfavorable event will
occur.88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
© BigCharts.com102030405060088 89 90 91 92 93 94P/E RatioGE Daily 6/18/07
SP500
GM95 96 97 98 99 00 01 02 03 04 05 06 07+1,600%
+1,400%
+1,200%
+1,000%
+800%
+600%
+400%
+200%
+0%
–200%Stock Performance, 1988–2007
F I G U R E 8! 1Source: http://online.wsj.com, The Wall Street Journal Online, January 12, 2008.