Thursday, 21 June 2012

Risk-Return Tradeoff

Definition of 'Risk-Return Tradeoff'

The principle that potential return rises with an increase in risk. 

  • Low levels of uncertainty (low risk) are associated with low potential returns, whereas high levels of uncertainty (high risk) are associated with high potential returns. 
  • According to the risk-return tradeoff, invested money can render higher profits only if it is subject to the possibility of being lost. 

Investopedia explains 'Risk-Return Tradeoff'

Because of the risk-return tradeoff, you must be aware of your personal risk tolerance when choosing investments for your portfolio. 

  • Taking on some risk is the price of achieving returns; therefore, if you want to make money, you can't cut out all risk. 
  • The goal instead is to find an appropriate balance - one that generates some profit, but still allows you to sleep at night.

Read more:

No comments: