The correlation between the hazards one runs in investing and the performance of investments is known as the risk-return tradeoff. The risk-return tradeoff states the higher the risk, the higher the reward—and vice versa.
What is the relationship between risk & return?
Generally, the higher the potential return of an investment, the higher the risk. There is no guarantee that you will actually get a higher return by accepting more risk. Diversification enables you to reduce the risk of your portfolio without sacrificing potential returns.
What is the relationship between risk and return on investment quizlet?
Explain the Risk- Return Relationship? The relationship between risk and required rate of return is known as the risk-return relationship. It is a positive relationship because the more risk assumed, the higher the required rate of return most people will demand.
What is the relationship between an investment risk and its return and explain how the use of risk differentiates among assets?
Return are the money you expect to earn on your investment. Risk is the chance that your actual return will differ from your expected return, and by how much. You could also define risk as the amount of volatility involved in a given investment.
What is risk and return in investment?
Return on investment is the profit expressed as a percentage of the initial investment. … Risk is the possibility that your investment will lose money.
What is meant by risk and return?
It is the uncertainty associated with the returns from an investment that introduces a risk into a project. The expected return is the uncertain future return that a firm expects to get from its project. … Risk is associated with the possibility that realized returns will be less than the returns that were expected.
Why is risk and return important?
Risk and Return Considerations. … Risk, along with the return, is a major consideration in capital budgeting decisions. The firm must compare the expected return from a given investment with the risk associated with it. Higher levels of return are required to compensate for increased levels of risk.
How does risk and return affect shareholders?
In investing, risk and return are highly correlated. Increased potential returns on investment usually go hand-in-hand with increased risk. … Diversification allows investors to reduce the overall risk associated with their portfolio but may limit potential returns.
Which statement is true of the relationship between risk and return?
Which statement is true of the relationship between risk and return? The greater the risk, the greater the potential return.
Which is true about risk and return?
Risk and return are inversely proportionate to each other. … Higher the risk associated with a security the lower is its return. C. Risk is a measure of the uncertainty surrounding the return that an investment will earn.
What is a risk and return profile?
The Risk Profile is designed to determine your level of tolerance to, and acceptance of, investment risk. Investment risk is the chance that the actual value of, or return from, an investment may be less than its expected value or return.
What is a risk in risk management?
Risk is defined as the probability of an event and its consequences. … Risk management focuses on identifying what could go wrong, evaluating which risks should be dealt with and implementing strategies to deal with those risks.