Question

Discuss how investment decisions are affected by risk and return.

Answer 1

Return

Investment returns are the amount you may earn or lose on your investment. The amount is usually expressed as a percentage per year.

As risk and return are fundamentally linked, the greater an investment’s potential to achieve higher returns, the greater the risk associated with it.

Risk

Investment risk is the possibility you may lose money on your investments or that your investments may not keep pace with inflation.

All investments carry risk. However, the level of risk varies depending on the type of investment.

Generally, investments considered to carry higher levels of risk are those that have the potential to deliver you higher investment returns, like growth assets. Similarly, investments with the potential to deliver you lower investment returns, like defensive assets, generally carry lower risk levels.

Risk can come from a range of sources depending on the type of investments you hold. For example, changes in investment markets, economies, and social and political environments, can affect different investments in different ways and cause them to go up or down in value.

The most common types of risk associated with investing include financial losses, liquidity and changes to inflation, interest rates or currency prices, as well as other investment-specific risks.

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