What is the Relationship Between Risk and Return?

What is the Relationship Between Risk and Return?

The relationship between risk and return, known as the risk-return tradeoff, states that higher risks are associated with the potential for higher rewards, and vice versa. Investors accepting higher levels of uncertainty have the chance for greater profits, while those opting for lower risk face more modest potential returns. This principle emphasizes the importance of balancing risk tolerance with investment goals to optimize the relationship between potential gains and potential losses.

Risk

Risk in finance is the chance of actual investment gains differing from expected outcomes, potentially leading to partial or total loss of the original investment. Strategies like diversification and hedging are used to mitigate these uncertainties.

Return

A return is the change in value of an investment over time, expressed as either a nominal or percentage change, indicating profit or loss.