Risk-Return Tradeoff

AAA

DEFINITION of 'Risk-Return Tradeoff'

The principle that potential return rises with an increase in risk. Low levels of uncertainty (low-risk) are associated with low potential returns, whereas high levels of uncertainty (high-risk) are associated with high potential returns. According to the risk-return tradeoff, invested money can render higher profits only if it is subject to the possibility of being lost.

INVESTOPEDIA EXPLAINS 'Risk-Return Tradeoff'

Because of the risk-return tradeoff, you must be aware of your personal risk tolerance when choosing investments for your portfolio. Taking on some risk is the price of achieving returns; therefore, if you want to make money, you can't cut out all risk. The goal instead is to find an appropriate balance - one that generates some profit, but still allows you to sleep at night.

RELATED TERMS
  1. Risk Profile

    An evaluation of an individual or organization's willingness ...
  2. Risk Curve

    A two-dimensional plot of real or projected financial harm/risk ...
  3. Casino Finance

    A slang term for an investment strategy that is considered extremely ...
  4. Equity Risk Premium

    The excess return that an individual stock or the overall stock ...
  5. Modern Portfolio Theory - MPT

    A theory on how risk-averse investors can construct portfolios ...
  6. Return

    The gain or loss of a security in a particular period. The return ...
Related Articles
  1. Achieving Optimal Asset Allocation
    Investing Basics

    Achieving Optimal Asset Allocation

  2. Determining Risk And The Risk Pyramid
    Investing Basics

    Determining Risk And The Risk Pyramid

  3. 5 Common Mistakes Young Investors Make
    Options & Futures

    5 Common Mistakes Young Investors Make

  4. Why Stocks Outperform Bonds
    Bonds & Fixed Income

    Why Stocks Outperform Bonds

comments powered by Disqus
Hot Definitions
  1. Passive ETF

    One of two types of exchange-traded funds (ETFs) available for investors. Passive ETFs are index funds that track a specific ...
  2. Walras' Law

    An economics law that suggests that the existence of excess supply in one market must be matched by excess demand in another ...
  3. Market Segmentation

    A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will ...
  4. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following: ...
  5. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  6. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious ...
Trading Center