Risk Return Trade off

However minuscule, any saving deployed into any asset is subject to some sort of risk; the magnitude of risk determined by a gamut of factors and eventualities. This trade-off which an investor faces between risk and return while considering investment decisions is called the risk return trade-off.

When one invests, it is with the basic intention that it would generate returns and help the money grow. The investor but obviously wants and wishes that he/she should be compensated for the risk one takes. The potential for return from an investment is expected to compensate for the risk that is undertaken: higher the risk in the investment, higher is the expected return.

Here the most important thing to understand is higher returns have an added element of high risk attached to it, but it is not the other way round- higher risk need not necessarily translate into a higher return.

For eg. investment in real estate has very high growth potential (capital appreciation and hedge against inflation), but is risky (remember the real estate bubble and sub-prime crisis?). Gambling is riskier but need to be high on returns, one can lose not only his capital employed but more than one actually has (remember Yudhisthir of Mahabharata?).