Judging Risk and Return of Financial Assets

This article examines the relationship between judgments of risk and judgments of expected return of financial assets. It suggests that for unfamiliar assets, both risk and return judgments are derived from global preference toward the asset, whereas for familiar assets, these judgments tend to be derived from the ecological values of the asset's risk and expected return—their values in the financial markets. In addition, the article examines the role of causal schemas and the role of risk attitudes in mediating the relationships between judgments of risk and return of familiar and unfamiliar assets. Conceptual and practical questions concerning the nature, the meaning, and the assessment of risk and expected return are discussed.