The Typical Relationship Between Risk and Return

Subject: Financial Management
Pages: 1
Words: 253
Reading time:
< 1 min

When it comes to investing, it is clear that the connection between risk and return is that the higher performance of the investment causes a higher risk.


The point of investing is growing the highest amount of money as much as possible within a specified period. Investing is a better opportunity of reaching some financial goals than merely saving up money. However, spending money always carries certain risks because there’s a high chance one could lose some or all capital. Thus, risk can be one of a business, meaning that the company a person invests in may go bankrupt. Another chance is connected with the volatility that establishes the fluctuation of investment’s value. There is also a liquidity risk connected with acquiring a buyer for the venture and the inflation risk.

The risk is thought to be much higher whether there is a higher return from the investment. However, the risk-return relationship does not necessarily mean getting more money if taking more risks. There are several kinds of investments: bonds, that are loans a person makes to some company to get interest payments, and stocks, which are the shares of one’s company. Stocks are riskier than bonds as their value fluctuates a lot more. It is possible to manage the risk using the diversification, which implies investing in different companies with different types of investments so that the chances are not that great. Thus, the risk and return must be measured thoroughly when one decides to invest in some business.