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No. Fundemantaly returns increase with risk, they do not diminish.

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15y ago

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What is the typical relationship between risk and return?

The typical relationship between risk and return is that higher risk investments generally offer the potential for higher returns, while lower risk investments tend to provide more modest returns. This principle is grounded in the idea that investors require compensation for taking on additional risk. Consequently, understanding this relationship is crucial for making informed investment decisions and aligning one’s risk tolerance with potential rewards.


What is an investment risk and how does it impact potential returns on investments?

Investment risk refers to the possibility of losing money or not achieving expected returns on an investment. The level of risk associated with an investment can impact the potential returns - generally, higher risk investments have the potential for higher returns, but also carry a greater chance of loss. Investors must carefully consider their risk tolerance and investment goals when making investment decisions.


What does the historical relation between volatility and return tell us about investors attitude toward risk?

The historical relationship between volatility and return suggests that investors generally seek higher returns as compensation for taking on greater risk. This risk-return tradeoff indicates that assets with higher volatility tend to offer the potential for higher returns, reflecting investors' willingness to accept uncertainty for the chance of greater rewards. Conversely, lower volatility assets typically provide more stable returns, appealing to risk-averse investors who prioritize capital preservation over high returns. Overall, this relationship shapes investor behavior and portfolio strategies based on individual risk tolerance.


What is the meaning of risk tasking?

Risk-taking means taking actions which might have unpleasant or undesirable results.


How to calculate premium for financial risk?

To calculate the premium for financial risk, you typically assess the potential loss associated with a particular investment or financial decision, taking into account factors such as market volatility, credit risk, and liquidity risk. This involves estimating the expected loss and incorporating the risk-free rate of return and a risk premium, which compensates for taking on additional risk. The premium can be calculated using models like the Capital Asset Pricing Model (CAPM) or through empirical data on historical returns relative to risk. Ultimately, the premium reflects the additional return required by investors to compensate for the inherent risks involved.