What is the relationship between risk and return?

Risk is the possibility of incurring financial loss or deviation from expected results. Return is the profit, income, or gain earned from an investment over a certain period.

There exists a positive relationship between risks and returns.

High Risk, High Return

Higher returns are associated with higher risk. This means that if an investor or business wants to earn a higher profit, they must be willing to take greater risks.

For example, investing in the stock market is riskier because share prices may rise or fall significantly. But if the investment performs well, the investor may earn a much higher return.

Low Risk, Low Return

On the other hand, investments with lower risk usually provide lower returns because the chance of loss is smaller.

For example, keeping money in a savings account in a bank is considered low risk because the possibility of losing money is very low. However, the return or interest earned is also low.

In short, higher risk generally means higher potential return, while lower risk generally means lower potential return. Therefore, risk and return are two sides of the same coin.