Risk return trade off wikipedia

The risk–return spectrum (also called the risk–return tradeoff or risk–reward) is the relationship between the amount of return gained on an investment and the amount of risk undertaken in that investment. The more return sought, the more risk that must be undertaken.

What is risk/return trade off?

The risk-return tradeoff is an investment principle that indicates that the higher the risk, the higher the potential reward. To calculate an appropriate risk-return tradeoff, investors must consider many factors, including overall risk tolerance, the potential to replace lost funds and more.

Why is risk-return trade off important?

Risk return trade-offs are essential components of investment decisions and assessing the portfolio. Also, it helps analyse the portfolio holdings, their concentration and the appropriate mix to balance risk and return at a portfolio level.

How is risk/return tradeoff calculated?

To determine the risk-return tradeoff of a specific mutual fund, investors analyze the investment's alpha, beta, standard deviation, and Sharpe ratio. Each of these metrics is typically made available by the mutual fund company offering the investment.

What is risk and return explain?

Risk and return in financial management is the risk associated with a certain investment and its returns. Usually, high-risk investments yield better financial returns, and low-risk investments yield lower returns. That is, the risk of a particular investment is directly related to the returns earned from it.