What is risk and return with example?

Definitions and Basics Description: For example, Rohan faces a risk return trade off while making his decision to invest. If he deposits all his money in a saving bank account, he will earn a low return i.e. the interest rate paid by the bank, but all his money will be insured up to an amount of….

What’s the relationship between risk and return?

A positive correlation exists between risk and return: the greater the risk, the higher the potential for profit or loss. Using the risk-reward tradeoff principle, low levels of uncertainty (risk) are associated with low returns and high levels of uncertainty with high returns.

What is the difference between risk/return and risk profile?

The risk profile for an individual should determine that person’s willingness and ability to take on risk. Risk can be thought of as the trade-off between risk and return, which is to say the tradeoff between earning a higher return or having a lower chance of losing money in a portfolio.

What do you mean by risk?

In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environment), often focusing on negative, undesirable consequences.

What makes a stock high risk?

A high-risk investment is one for which there is either a large percentage chance of loss of capital or under-performance—or a relatively high chance of a devastating loss.

When it comes to investing what is the typical relationship between risk and return?

When it comes to investing, the typical relationship between the risks and returns was that the greater the potential risk, the greater the investment return an investor will get. That is why investments are very risky, and an investor must be a risk-taker to attain such success.

What is the relationship between risk and expected return?

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.

Is there a positive correlation between risk and return?

There is a positive correlation between risk and return with one important caveat. There is no guarantee that taking greater risk results in a greater return. Rather, taking greater risk may result in the loss of a larger amount of capital.

What relationship does risk have to return?

In general terms, the relationship between return and risk is that “b. Investments with low risk have lower returns,” since the lower risk means that more people will usually invest.