Final answer:
The statement that risk should be reduced to an acceptable level is true, as history has shown that high risk can harm an investment portfolio. The concept of asymmetric risk illustrates the importance of managing potential threats, similar to buying insurance. Investors must balance the tradeoff between return and risk, which depends on personal preferences and the investment time frame.
Step-by-step explanation:
The statement 'The best bet is to reduce risk to a level that can be accepted' is true. In the context of financial investing, a high level of risk has historically proven to be detrimental to an investment portfolio, particularly when investors do not properly assess or mitigate potential threats. For instance, during financial crises like the dot-com bubble burst in 2000 or the global financial meltdown in 2008, portfolios with high-risk investments suffered significant losses.
As depicted in Figure 20.1 on asymmetric risk, if a catastrophic threat is possible, the prudent plan (Plan B) is to mitigate that risk. This concept parallels the rationale of buying insurance; it's about managing low-probability but potentially devastating events. While high-risk strategies might promise greater returns, they also increase the likelihood of severe consequences if things go wrong. By reducing risk to an acceptable level, investors can guard against financial ruin, and secure the longevity and health of their investment portfolio.
It is also essential to consider that the tradeoff between return and risk will be influenced by individual preferences and the time frame of investments. Short-term investments may weather higher risks differently than long-term ones. Thus, risk assessment is a dynamic process and should be adjusted according to the particular circumstances of each investor's situation.