ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -First is the principle that risk and return are directly related. The greater the risk that an investment may lose money, the greater its potential for providing a substantial return. By the same token, the smaller the risk an investment poses, the smaller the potential return it will provide.

Detailed explanation-2: -The appropriate risk-return tradeoff depends on a variety of factors including an investor’s risk tolerance, the investor’s years to retirement and the potential to replace lost funds. Time also plays an essential role in determining a portfolio with the appropriate levels of risk and reward.

Detailed explanation-3: -The relationship between risk and expected return is typically described as linear (e.g. the Security Market Line or SML).

Detailed explanation-4: -High levels of uncertainty (high risk) are associated with high potential returns. The risk/return graph is the balance between the desire for the lowest possible risk and the highest possible return. Below chart will show the type of funds come in which part of risk-return graph.

Detailed explanation-5: -If you want high liquidity and low risk, you’re going to have a low return. You’re probably going to be putting your money into something like a savings account. If you want low risk and high return, you’re going to have to give up liquidity.