There is no such thing as high return without risk - Gerry Schwartz
One of the long aged fundamental concepts of finance is the relationship between risk and return. In general, as investment risks rise, investors expect higher returns to compensate for taking those risks. The greater the amount of risk an investor is willing to take, the greater the potential return. Risks can come in various ways and investors need to be compensated for taking on additional risk.
Using this principle, individuals associate low levels of uncertainty with low potential returns, and high levels of uncertainty or risk with high potential returns. According to the risk-return tradeoff, invested money can render higher profits only if the investor will accept a higher possibility of losses.
Investors use this rule of thumb to determine whether to embark on an investment. If an investment carries high risks without a corresponding high return, it will be shunned by many investors as it is deemed not to be worth it.
The appropriate risk-return tradeoff depends on a variety of factors including an investor’s risk tolerance, the investor’s years to retirement and the potential to replace lost funds. Time also plays an essential role in determining a portfolio with the appropriate levels of risk and reward.
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