Risk-On Risk-Off

AAA

DEFINITION of 'Risk-On Risk-Off'

An investment setting in which price behavior responds to, and is driven by, changes in investor risk tolerance. Risk-on risk-off refers to changes in investment activity in response to global economic patterns. During periods when risk is perceived as low, risk-on risk-off theory states that investors tend to engage in higher-risk investments. When risk is perceived as high, investors have the tendency to gravitate toward lower-risk investments.

INVESTOPEDIA EXPLAINS 'Risk-On Risk-Off'

Investors' appetites for risk rise and fall over time, and at times they are more likely to invest in higher-risk instruments than during other periods, such as during the 2009 recovery. The 2008 financial crisis was considered a "risk off" year, in which investors attempted to reduce risk by selling existing risky positions and moving money to either cash positions or low/no-risk positions, such as U.S. Treasury bonds.

RELATED TERMS
  1. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. ...
  2. Price Risk

    The risk of a decline in the value of a security or a portfolio. ...
  3. Risk-Return Tradeoff

    The principle that potential return rises with an increase in ...
  4. Risk

    The chance that an investment's actual return will be different ...
  5. Market Risk

    The possibility for an investor to experience losses due to factors ...
  6. Risk Financing

    The determination of how an organization will pay for loss events ...
RELATED FAQS
  1. Which markets are most prone to market failure from adverse selection?

    Adverse selection causes market failure -- a sub-optimal level of beneficial trades -- whenever material information cannot ... Read Full Answer >>
  2. What does it mean to be absolutely risk averse?

    Some people are absolutely risk-averse, which means that they cannot tolerate sustaining any sort of loss, even a temporary ... Read Full Answer >>
  3. Are all fixed costs considered sunk costs?

    In accounting, finance and economics, all sunk costs are fixed costs. However, not all fixed costs are considered to be sunk. ... Read Full Answer >>
  4. What are some popular mutual funds that give exposure to the drugs sector?

    The pharmaceutical industry has experienced outstanding growth in the 10 years leading up to 2015, consistently outperforming ... Read Full Answer >>
  5. What is the correlation between equity risk premium and risk?

    The equity risk premium refers to the amount of additional return an investor can obtain from investing in an asset over ... Read Full Answer >>
  6. Can the Efficient Market Hypothesis explain economic bubbles?

    The efficient market hypothesis (EMH) cannot explain economic bubbles because, strictly speaking, the EMH would argue that ... Read Full Answer >>
Related Articles
  1. Investing Basics

    5 Things To Know About Asset Allocation

    Overwhelmed by investment options? Learn how to create an asset allocation strategy that works for you.
  2. Investing

    The Advantages Of Bonds

    Bonds contribute an element of stability to almost any portfolio and offer a safe and conservative investment.
  3. Bonds & Fixed Income

    Corporate Bonds: An Introduction To Credit Risk

    Corporate bonds offer higher yields, but it's important to evaluate the extra risk involved before you buy.
  4. Investing Basics

    Introduction To Investment Diversification

    Reducing risk and increasing returns in your portfolio is all about finding the right balance.
  5. Mutual Funds & ETFs

    5 Ways To Measure Mutual Fund Risk

    These statistical measurements highlight how to mitigate risk and increase rewards.
  6. Insurance

    The Dangers Of Over-Diversifying Your Portfolio

    If you diversify too much, you might not lose much, but you won't gain much either.
  7. Options & Futures

    Options Greeks

    Get to know the essential risk measures and profit/loss guideposts in options strategies.
  8. Trading Strategies

    Understanding Bottoms & Bottoming Patterns

    Analysis lowers the risk of bottom picking by identifying common characteristics of securities transitioning from downtrends to uptrends.
  9. Economics

    What is Adverse Selection?

    Adverse selection occurs when one party in a transaction has more information than the other, especially in insurance and finance-related activities.
  10. Fundamental Analysis

    Explaining Expected Return

    The expected return is a tool used to determine whether or not an investment has a positive or negative average net outcome.

You May Also Like

Hot Definitions
  1. Adverse Selection

    1. The tendency of those in dangerous jobs or high risk lifestyles to get life insurance. 2. A situation where sellers have ...
  2. Wash Trading

    The process of buying shares of a company through one broker while selling shares through a different broker. Wash trading ...
  3. Fixed-Income Arbitrage

    An investment strategy that attempts to profit from arbitrage opportunities in interest rate securities. When using a fixed-income ...
  4. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  5. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  6. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
Trading Center