Risk-Return Concepts Essay Example | Topics and Well Written Essays - 500 words

Risk-Return Concepts - Essay Example Thus, small investors concentrate on putting their money on government bonds, debt, and real estate. These decisions are somehow warranted due to the investor's aversion to risk. However, in addressing this situation, it is crucial to look at one of the core principles in finance-the risk-return concept. The risk-return principle stipulates that the potential return of an investment rises with its potential risk (Risk-Return Tradeoff 2003). In other words, low risk investments generate low rewards to the investor while high risk ones presents probable returns. The risk and return principle clearly asserts that investors are faced with the tradeoff between risk and return. In line with this, an investment risk pyramid is devised in order to fully understand the equation of risk and return. The base of the pyramid is occupied by low risk-low return investments such as cash, cash deposits, notes, bills, and government bonds. It should be noted that these financial instruments often have a fixed return for a certain duration making investors less prone to financial default. The middle of the pyramid is occupied by medium risk investment like real estate, mutual funds, large/small capital stocks, and high income bonds and debt.