Question

Describe risk-return tradeoff and why it is important to financial managers.

Answer 1

The risk-return tradeoff highlights the potential return rises with a rise in the risk and by applying this principle, individuals formed low levels of uncertainties with less potential returns, and high levels of uncertainities or risk with high potential returns. The risk-return tradeoff, investmet of money can provide higher profits only if the investor will agree with the higher chances of losses.

It is important to the financial managers in the important ways :

Because financial managers are always focused on increasing the returns and lower the risk for the company and investors as well and below are the points which helps in getting more returns with certain level of risk.

1) Construction of portfolio - Asset allocation is the required process for developing a portfolio that bridges the gap between the risk and return necessities of the investor.

2) The portfolio of an investor is highly utilized when he invested in the products with the low level of risk for a given level of return or a person invest with the highest level of return for a given level of risk.