Understanding Investment Risk and Return 

By Greg Filbeck

Hunter Holzhauer and I are very excited about our new title, Understanding Investment Risk and Return, which explores the tradeoff between risk and return and the value added by a careful analysis of their interaction.

The book highlights appropriate frameworks for measuring risk and returns while recognizing the impact of such tradeoffs over longer periods. We explore the differences in risk and return across asset classes and how modifying through derivative securities can help us understand the integrated nature of risk and return more holistically. The book also addresses behavioral finance issues, noting that not all investors view risk rationally.

Understanding Investment Risk and Return explores the consequences of past miscalculations of risk and returns, setting the stage for how advanced techniques and emerging developments will improve future decision-making. Rather than focusing on tedious statistical frameworks, this book presents the topics with a conceptual understanding of past work’s findings, incorporating mathematical concepts where necessary to highlight a broader understanding of topics related to risk and return.

Many books provide a theoretical, often technical, explanation of asset pricing models, including mathematical derivations, which are well-suited to an academic or graduate-level content presentation. Likewise, other titles attempt a simplistic guide for beginner investors interested in understanding how risk and return intersect. Our book seeks to bridge the gap between the two by incorporating research findings in a way that translates well for practitioners and individual investors seeking a deeper understanding of the topic without delving into unnecessarily complex theoretical frameworks. The scope of the coverage is broad, attempting to encompass the most important aspects of risk and return management.

We’ve created four sections within our book:

• Foundations of Risk and Return. The first section provides an overview of how managing risk and return adds value, and how to measure and manage both.
• Risk-Return Management and Analysis. The second section focuses on managing risk and returns over time, measuring risk-adjusted performance, prioritizing risks, and understanding, applying, and critiquing different factor models.
• Risk and Asset Classes. The third section explains the risk-return differences across asset classes, how derivatives can be used to speculate on and hedge risk, and the role irrational investors play in risk-return tradeoffs.
• Going Forward. The fourth section focuses on the future by first examining lessons learned from past market bubbles and bankruptcies, as well as emerging tools and models, including AI and machine learning.

Understanding Investment Risk and Return has several distinguishing features.

• The book offers a synthesis of research studies in an easy-to-follow presentation. It provides a detailed presentation of investment risk and return practices. It is written to combine the conceptual world of scholars with the applied view of practitioners. Our book contains contributions and perspectives from authors, including those from academia and practice.
• When presented, the results of empirical studies link theory with practice in a concise manner that can be useful for sophisticated readers. Each chapter contains four to six discussion questions that reinforce the key concepts discussed. The guideline answers provide readers with a chance to assess their mastery of chapter content. This feature should be especially important to faculty and students using the book in the classroom.

Our primary target audience for Understanding Investment Risk and Return comprises sophisticated practitioners, individual and institutional investors, academics, graduate finance students, and libraries. Experienced practitioners can use this book to navigate the key areas of investment risk and return. Individual and institutional investors can expand their knowledge and apply the content to enhance portfolio management. Academics can use this book for a special topics course on risk or return, or as a supplemental text for investment management courses. Graduate students can benefit from this book as a reference source. Libraries may find this book a useful addition to their collection. The book covers a broad array of topics that are relevant to investments, portfolio management, and risk management programs.

We hope you have a chance to read Understanding Investment Risk and Return. I think you will find it is written to capture the key elements of risk and return, engaging the reader and promoting mastery of subject topics.

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This article was written by Greg Filbeck, Samuel P. Black III Professor of Finance and Risk Management, Black School of Business, Vice Chancellor and Associate Dean for Academic Affairs, Penn State Behrend