Risk-return trade-off

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Risk-return trade-off

The tendency for potential risk to vary directly with potential return, so that the more risk involved, the greater the potential return, and vice versa.

Risk-Return Trade-Off

The concept that every rational investor, at a given level of risk, will accept only the largest expected return. That is, given two investments at the exact same level of risk, all other things being equal, every rational investor will invest in the one that offers the higher return. The risk-return tradeoff is pervasive throughout economics and finance. It is the reason that riskier bonds pay higher coupons than other bonds. It is also the reason that bonds pay lower returns than most stocks because they are a less risky investment. The Markowitz Portfolio Theory attempts to mathematically identify the portfolio with the highest return at each level of risk. See also: Markowitz Efficient Portfolio.
References in periodicals archive ?
Moreover, in a competitive insurance market, the competition for increased risk-return payoffs is not restricted only to consider the risk return trade-off curves within the industry.
Investors need to recognize this risk return trade-off.
2005) Risk Return Trade-offs from Hedging Oil Price Risk in Ecuador.
The planning process may involve a comprehensive analysis of the risk return trade-offs of multiple asset classes or may consist of a simple set of maturity guidelines for a single currency fixed-income portfolio.