Risk & Return(Risk vs Return Trade-Off)

 

Risk

 

Definition: Risk refers to the possibility of losing some or all of the invested money.

Example: Imagine you're considering two investment options - one in a stable government bond and another in a new, small startup. The startup investment carries higher risk because startups can be unpredictable and may fail, leading to a loss of your invested money.

 

 

Return

 

Definition: Return is the profit or gain you expect to make from an investment.

Example: If you invest in a safe government bond, the return may be lower but more predictable. On the other hand, investing in a successful startup could potentially bring higher returns, but it comes with greater uncertainty and risk.

 

 

 

 

Risk vs Return Trade-Off

 

What it means: Trade-off is like finding a balance between risk and return that you're comfortable with.

 

Principle: Generally, the higher the potential return, the higher the risk. Conversely, lower-risk investments typically offer lower returns.

Example: If you choose a low-risk investment like a savings account, the returns are usually modest. However, if you opt for a riskier investment like stocks, the potential for higher returns exists but with a greater chance of losing money.

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Thankyou For Reading

- COMMERCE KA LADKA