What is a 'Risk Lover'

A risk lover is an investor who is willing to take on additional risk for an investment that has a relatively low additional expected return in exchange for that risk. Risk lovers will seek out extremely risky investments that are prone to a return distribution with excess kurtosis. Excess kurtosis in a return distribution means there is a frequent instance of high standard deviation outcomes with the investment returns. The investment is prone to very low or very high returns.

BREAKING DOWN 'Risk Lover'

A risk lover contrasts the typical investor mentality — risk aversion. Risk averse investors tend to take on increased risks only if they are warranted by the potential for higher returns. A risk loving investor does not need to see a pattern of high returns which compensate for the extra risk in order to take on a risky investment.

There is always a risk/return tradeoff in investing. Lower returns are usually associated with lower risk investments. Higher potential returns are associated with investments of higher risk, as most investors expect to be compensated for taking on additional risk. Risk lovers, however, go against this principle: they acquire investments of higher risk with a lower expected return. This can be very challenging for financial advisors to deal with. It might be advisable to deal with the cognitive or emotional error before engaging with the client. Many emotional or cognitive biases might manifest as a risk lover. It is best to identify and mitigate the bias.

RELATED TERMS
  1. Risk Discount

    A risk discount refers to a situation where an investor is willing ...
  2. Professional Risk Manager - PRM ...

    Professional risk manager is a designation awarded by the Professional ...
  3. Risk Management

    Risk management occurs anytime an investor or fund manager analyzes ...
  4. Eat Well, Sleep Well

    "Eat well, sleep well" is an adage that says that the type of ...
  5. Company Risk

    Company risk is the financial uncertainty faced by an investor ...
  6. Specific Risk

    Specific risk is a risk that affects a minimal number of assets, ...
Related Articles
  1. Personal Finance

    What Does It Really Mean to Be Risk Averse?

    We can’t really get away from risk and there are many meanings for this thing we call risk.
  2. Investing

    The Risks Associated with Common Investments

    Investing inherently involves some risk. Here are some of the different types of investment risks.
  3. Insights

    How to Invest In Developing Markets

    Developing markets can be attractive additions to many investor's portfolios, but carry additional risks that must be considered.
  4. Investing

    Using Logic To Examine Risk

    Know your odds before you put your money on the table.
  5. Financial Advisor

    Active Risk vs. Residual Risk: Differences and Examples

    Active risk and residual risk are common risk measurements in portfolio management. This article discusses them, their calculations and their main differences.
  6. Investing

    Low-Risk vs. High-Risk Investments for Beginners

    Understanding risk is key to better investing. Determining where risk lies and knowing the difference between low risk and high risk are crucial.
  7. Financial Advisor

    Pro Tips on Evaluating Clients' Risk Tolerance

    Want to keep clients longer? Bolster your risk assessment capabilities.
  8. Investing

    Measuring a Fund's Risk and Return

    Learn the importance of the risk-return relationship in selecting a mutual fund.
  9. Financial Advisor

    Behavioral Finance Tips for Advising Your Clients

    Here's how advisors can prevent clients from making irrational investment decisions.
RELATED FAQS
  1. What Are the Components of a Risk Premium?

    Learn the five main risks that comprise the risk premium and how they affect investors. Read Answer >>
  2. What are some examples of risk management techniques?

    Understand what risk management is in business and why it is a necessary component of ongoing business planning, and review ... Read Answer >>
  3. How does market risk differ from specific risk?

    Learn about market risk, specific risk, hedging and diversification, and how the market risk of assets differs from the specific ... Read Answer >>
  4. Use market risk premium for expected market return

    Find out how the expected market return rate is determined when calculating market risk premium – and how to estimate investment ... Read Answer >>
Hot Definitions
  1. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  2. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  3. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  4. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  5. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  6. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
Trading Center