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Home > Finance > Question

What is the Risk-Return Trade-off:

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A) Risk and return are unrelated
B) Higher risk is associated with higher expected return
C) Higher risk leads to lower return
D) Return is fixed regardless of risk

Correct Answer: B) Higher risk is associated with higher expected return

• The absolute fundamental investing principle dictates that Higher risk is associated with higher expected return. • Rational corporate investors will only accept massive additional risk if they are heavily compensated with a Risk premium. • Extremely safe financial assets like US Treasury bonds traditionally offer very Low returns. • Highly volatile financial assets like modern cryptocurrency generally offer potentially High returns. • Spreading corporate investments randomly to lower overall portfolio risk is called Diversification.

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