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Today, we're going to talk about one of the most basic concepts of investing—risk.

There's overwhelming evidence that when it comes to a large part of their net worth, like their retirement savings, investors are risk-averse. What that means is they will demand a premium for holding risky assets.

If the 10-year Treasury is yielding 4.5%—which is about what it is today—investors will demand an expected return greater than that to induce them to bear risk.

Well, it's easy to talk about risk, but what exactly do we mean?

Academics tend to use mathematical definitions of risk, like the standard deviation of returns. But that may not be relevant for real-world investors. Risk, to them, is what they perceive to be risk.

Let me give you an example of how that perception may change over time and, in turn, influence the level of the market.

Video Length: 00:07:28

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