Investments are based on the belief that the rate of return justifies or compensates the investor for the risk associated with that particular investment. The risk associated with this investment is the chance that a loss will be incurred. Or, to put it another way, the greater the chance of a loss the riskier the investment. Therefore, some statistical measures of the risk involved with an investment are necessary before the investment is made.

Address one of the following prompts in a concise but thorough manner.

• What is the Expected Rate of Return on investment and what does it tell us about the probability of the risk involved with a particular investment?
• In terms of risk, what are the advantages (and/or disadvantages) of a well-diversified portfolio?