What is the Relationship Between Risk and Return?

Relationship Between Risk and Return

The primary aim of investments is to ensure that your money grows as much as possible. Whether you’re saving for a specific goal such as a down payment on a new home or you’re planning for your retirement, investments have the potential to help you to reach your financial goals more quickly compared to simply saving money.

The Basic Principles of Risk

Risk simply refers to the potential loss associated with investment decisions. The concept of “guaranteed” investments is a myth, and all investments carry at least some risk.

The Different Types of Risk

To understand the relationship between risk and return, you need to know that there are different types of financial risk. The most notable include: 1. Liquidity 2. Inflation 3. Business 4. Volatility

The Risk and Return Relationship

Investopedia confirms that there is a positive correlation existing between risk and return; higher risk creates a greater potential for profit or loss. While this may seem tricky for a new investor to understand, it is possible to break it down into simple terms.

Managing Your Investment Risk

Fortunately, there are a number of strategies and techniques to manage investment risk. Diversification is one of the most commonly used strategies, and this involves carrying different investment types within your portfolio. This allows you to still enjoy decent returns, but the overall risk is lowered.

Evaluating Your Risk Profile

There isn’t a one size fits all answer to how much risk you are willing to accept in your investment portfolio; it depends on different factors. There are three main areas that need to be considered to determine if a specific investment is the right choice for you. 1. Financial goals 2. Investment timeline 3. personal risk tolerance

How Do You Manage the Relationship Between Risk and Return?

All investments carry some risk, but it is very risky to focus on just one investment. The most effective way to protect yourself is to use diversification. There are different models to employ diversification, but it can be done just by splitting your investment money between several different assets.

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