33The leap of faith
‘Good. So the government bond is risk-free and should pay us 4
per cent interest per annum. This is the safest possible investment
we can choose. Our capital is pretty much guaranteed. The
trade-off is that we will only make a small return. But, remember,
some investors are more interested in capital preservation and a
regular income than the chance of sky-high gains.’
You demand extra return for moving from bonds to shares
I turned back to my graph. ‘Imagine you are the supermarket.
How much more return do you need to offer investors? You have
to give them some extra reward for moving from the absolute
safety of the bond. The supermarket is a relatively safe business,
but there are many more risks than with the government bond.
How much more return would you need to buy a share in the
supermarket?’
Anisa pondered. ‘Six per cent more?’
‘That means you’re looking – on average – for an annual return
of 10 per cent from a stable share.’
‘Correct. Why don’t you plot it on the graph?’
I did.
Return
10%
Low Medium
Risk
High
Stable share
Government
bond