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.
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