Financial market risk

A basic rule for initial assessment of a financial asset consists of placing it at the apex of a triangle that corresponds to it, as follows:

 

http://www.cmb.mc/uploads/pages/actif-financier-en.png

 

No bona fide financial instrument possesses all three qualities (high return, low risk and good liquidity) at the same time.

A product that seems to offer the qualities required to maximise or minimise all three points of the triangle has either been inadequately explained, with one of its characteristics undisclosed, or has a hidden flaw and should be submitted for independent professional analysis.

We therefore reiterate, as an extension of this basic rule:

  • Very liquid, risk-free investments offer only low returns: for example money market products
  • Very liquid investments with high expected returns have high risk levels: for example-  equities
  • Very liquid assets with very high risk levels offer high potential returns: for example -  options

At best, an asset can combine two  qualities corresponding to two points of the above triangle.