Investment Performance Measurement (Frank J. Fabozzi Series) : 9780471268499

Investment is an initial forfeit of something we value in exchange for
the anticipated benefit of getting back more than we put in. The difference
between what we put in and what we got back is the return; we
invest in order to yield this return. For financial assets return includes
both the gain we receive when we finally either sell them to someone
else, or they mature, as well as the income earned between the purchase
and sale. Return is compensation for giving up the use of the capital in
the interim. For most investments at the outset we cannot be sure of the
value of the income and gains we will receive. The spectrum of instruments
we could invest in provides a varying degree of return uncertainty.
We can predict the return we will earn on a one-month T-bill
with complete accuracy where we couldn’t hazard a guess as to the
return of an investment in an emerging markets stock fund. Financial
theory and experience suggest that the highest return given a particular
level of risk taken is likely to be achieved via the diversification of our
assets across multiple security holdings. So we usually invest via a portfolio
of securities, or a set of portfolios each managed to a particular
objective. The higher the degree of return uncertainty, or risk, in a given
investment, the more return we demand.