Question

Your friend promises you an investing opportunity that she claims has no risk but will provide a guaranteed 20% annual return. (Note: U.S. Treasuries are providing a return of 2%.) What should you do? Group of answer choices Split the difference: put half of your investment in your friend's investing opportunity and half in U.S. Treasuries. This is possible but you should at least check out your friend's track record and if there are investors who have been receiving 20% return anually, go ahead and invest. Don't invest. This sounds like a scam because it is not consistent with the relation between risk and return. This sounds like a sweet deal. Invest $100,000 with your friend.

Answer 1

While making investment decisions, one important aspect to consider is what one is getting in return for the investment being made. Though this is one of the first things investors think of, another aspect, though comparatively less discussed but equally as important, is the quantum of risk being taken while making the investment.

The relationship between these two aspects of investment is known as the Risk-Return Tradeoff.

It is vital to note here that increasing risk does not guarantee higher return; it just raises the possibility of it.

Thus, in this case if investment is to be made,first the track records of the friends must be checked and then on the basis of the risk taking capacity alternative should be chosen.

Hence,1) if higher risk can be taken then after checking out the track record,investment can be made with the friend.

2) if the investor doesn't want to take the risk then go for US treasuries wchich provide lower return with almost zero risk