Why is the phrase''risk drives expected returns''true?

Answer 1

The phrase "risk drives expected returns" is true because investors require compensation for taking on additional risk. Generally, higher-risk investments, such as stocks or venture capital, are expected to yield higher returns over the long term to offset the potential for loss. Conversely, lower-risk investments, like government bonds, typically offer lower returns. This relationship reflects the fundamental principle that greater uncertainty in investment outcomes necessitates a higher potential reward.