Question

Trade off between  Risks  and  Return?

Answer 1

Ans.

The principle of risk-return tradeoff states that potential return rises with an increase in risk. The Lower the levels of uncertainty or risk the lower are potential returns, whereas the higher the levels of uncertainty or risk, the higher are potential returns. According to the risk-return tradeoff, invested money can render higher profits only if the investor is willing to accept the possibility of losses
The factors on which risk-return tradeoff depends are:

a) Risk tolerance,

b) Years to retirement

c) Potential to replace lost funds.

Time can also play an essential role in determining a portfolio with the appropriate levels of risk and reward. For example, the ability to invest in equities over the long-term provides the potential to recover from the risks of bear markets and participate in bull markets, while a short time frame makes equities a higher risk proposition.

For investors, the risk-return tradeoff is one of the essential components of each investment decision as well as in the assessment of portfolios as a whole. At the foundation of this assessment, the consideration of the risk as well as the reward of an investment can determine whether taking action makes sense or not. At the portfolio level, the risk-return tradeoff can include assessments on the concentration or the diversity of holdings and whether the mix presents too much risk or a lower than desired potential for returns