Are you curious about investing but confused about all the talk about “risk” and “return”?
Don’t worry, and we’ll explain everything in plain English.
What is Risk Return?
Risk return is a fancy way of talking about how investing involves both the possibility of making money and the possibility of losing money.
It’s like a game of chance: the more you risk, the more you can potentially win, but also, the more you can potentially lose.
The relationship between risk and return is called the “risk-return trade-off” or “risk-reward trade-off.”
It’s a theory that generally says the higher the risk, the higher the potential return.
So, to earn a higher return, you need to be willing to take a higher risk.
Let’s say you’re considering investing in stocks or bonds.
Stocks are generally considered riskier because they can be more volatile, meaning their value can go up and down quickly.
On the other hand, bonds are considered less risky because their value tends to be more stable.
Because of this, stocks have the potential to provide a higher return (around 7-8% on average), while bonds have the potential to provide a lower return (around 2-3% on average).
Is a High Risk Always Better?
Nope, not always. While a higher risk does have the potential for a higher return, it’s not guaranteed.
There’s always a possibility that you could lose money.
So, while taking risks in investing is important, it’s also important to be smart and cautious about it.
Can Low-Risk Investments Provide Higher Returns?
It’s possible for a low-risk investment to provide a higher return in the short term, but it’s unlikely in the long run.
Generally, the less risk you take, the less potential for a high return.
The Bottom Line
Investing can be a great way to make your money grow, but it’s important to understand the risks involved. Remember: the more you risk, the more you can win or lose. And always be careful with your money.
Thanks for reading! We hope you found this helpful. And remember, Finance is Your Friend!