Although expected return is the best estimate available of future returns, the actual return is not likely to equal the expected return.
This is the first sentence of what looks to me like a good article on risk and return, although it's much more advanced than our basic article. Here's the link: http://ci.columbia.edu/ci/premba_test/c ... /s6_4.html
Also, it may be useful to see this, which was included in an earlier version of our basic article. It was to set up the subsequent sections, but since we moved most of that material to the "advanced" article we're working on now, it was removed:
Even though this definition of risk sounds simple, questions arise:
- How is uncertainty of returns (risk) evaluated and measured for different types of investments?
- What is "expected rate of return", and how is it evaluated?
- What can be done to manage risk?
- How does an investor factor risk into investment decisions?
- Are there differences between short-term risk and long-term risk?
- The definition above does not distinguish between positive and negative outcomes. Isn't risk just the possibility that the investor will lose money on the investment?
You can see that the second and last items specifically address the issue of the definition of "expected return" and the concept that risk is not just considered "the possibility of loss" in portfolio theory.
I'm still thinking adding a couple of paragraphs to the intro could clear up some of the concerns, at least for those who think the article is basically OK, but needs some tweaking to add clarity.