Question

The relationship between investment risk and potential return is positive. Analyze the risks of investment and the returns from investment.       

Answer 1

There is a positive relationship between investment risk and potential return. These are directly proportional to each other.

GREATER THE RISK HIGHER POTENTIAL FOR PROFIT/LOSS

We may say that,

1. Low-risk investment : In this type, investment is done in government bonds with low yields . Basically the motive is to reduce the risk of loss but as the risk decreases the potential return is also low due to low yield /rate .

2. High risk investments: In this type, investments is done in debt funds, share market, mutual funds ,etc risky sectors. Here, in this case the involvement of risk is high thus the potential of return is also high and may generate higher returns. They may yield high return value.

Investor needs to understand his individual risk bearing capacity lio of assets. Risk tolerance may be affected by the following factors:

• Remaining time period till retirement
• Income
• Expenditure
• Loans and other liabilities
• Assests with him
• Loss bearing potential
• Family and future planning