4. How to Increase Your Expected Returns

• A company raises funds ("capital") from investors (stock) or lenders (bonds, loans, CD's…)
• The riskier the company is, the higher the rate of return it must promise to attract capital.
• Investors provide this capital. The investor's return is the company's cost of capital.
• The only way an investor can expect a higher expected return is to invest in a riskier company
• Therefore, risk and expected returns are related

Not by forecasting business cycles or interest rates, nor by shifting allocations between stocks and bonds, nor by searching out "undiscovered" stocks, nor even with a crystal ball can investors increase returns. Indeed the stock brokers and publications that promote these ideas can only lower your returns.

INVESTMENT REALITY #1
THE ONLY WAY TO INCREASE YOUR EXPECTED RETURNS IS TO ASSUME MORE RISK.

Risk & Returns Home