Risk-return tradeoff

Risk-return tradeoff

The basic concept that higher expected returns accompany greater risk, 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 ?
As we have previously reported, Prosper's mix of "well priced" loans - loans with an attractive risk-return tradeoff - has dramatically changed from the same period last year with approximately a 200% increase in the percentage of "well priced" loans and a six-fold decrease in "low priced" loans - loans with an unattractive risk-return tradeoff.
Very broadly, we look at listings that, based on historical Prosper loan performance data, can be made at an attractive risk-return tradeoff and those that can only be made at an unattractive risk-return tradeoff.
Ibbotson researchers found that the BXM has had the best risk-adjusted performance of the major domestic and international equity-based indexes over the last 16 years, and that the index enhances the risk-return tradeoff when added to a portfolio.
Alternative investment strategies have unique characteristics that, if implemented correctly, can enhance the risk-return tradeoff in a portfolio.
By altering what decisions must be made, when they are made, who makes them, the incentives driving the decisions and why they are made, firms can invent business models that change the risk-return tradeoff.
Therefore, typically a reduction in risk would be accompanied by lower returns or increased costs, reflecting the risk-return tradeoff.
Successfully embedding them requires both top-down support from senior management and bottom-up support from a risk-aware culture--a culture in which frontline risk takers actively seek to optimize the risk-return tradeoff.
As you can see from the historical performance, The Salient Risk Parity Index exhibits fairly consistent year-to-year returns and an attractive risk-return tradeoff.
Similar to other corporate investments, tax investments need to weigh the risk-return tradeoff.
This makes sense, if we remember the risk-return tradeoff.
In addition, this study empirically investigates the validity of Merton's (1973) intuition, according to which variables that affect the risk-return tradeoff (or investment opportunity set) of an investor should also receive nonzero risk premia and explain equilibrium-expected returns.
Given the large premium required by investors in public equity, it is puzzling why households willingly invest substantial amounts in a single privately held firm with a far worse risk-return tradeoff.