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: http://www.investopedia.com/terms/r/riskreturntradeoff.asp#ixzz1yNTT4zyp