ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -What is Risk-Return Tradeoff? The risk-return tradeoff states that the potential return rises with an increase in risk. Using this principle, individuals associate low levels of uncertainty with low potential returns, and high levels of uncertainty or risk with high potential returns.

Detailed explanation-2: -The pyramid, representing the investor’s portfolio, has three distinct tiers: low-risk assets at the bottom such as cash and money markets; moderately risky assets like stocks and bonds in the middle; and high-risk speculative assets like derivatives at the top.

Detailed explanation-3: -The investment risk pyramid is an asset allocation strategy whereby low-risk assets like cash and treasuries are placed at the bottom, and smaller allocations to riskier assets like growth stocks are placed at the top.

Detailed explanation-4: -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.