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.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
References in periodicals archive ?
In the risk return trade off, the Middle East region stands a lesser chance of attracting funds from developed markets.
On this same line of research, the next paper, "Linkages between Value based Performance Measurements and Risk Return Trade off: Theory and Evidence", is another empirical paper in finance that endeavors to investigate the linkages between value based performance measurements and risk-return trade off by explaining cross sectional asset returns.
In doing so, we had fifteen (15) observations used in second pass regression depicted in Figure 11 for investigating risk return trade off. The portfolios constructed with ten stocks when stocks sorted from the one with highest beta to lowest except the last portfolio which consists of 14 stocks whose betas are lowest.
Explained variations in portfolio mean return in this case increased to 46% and lead us to conclude that such sorting procedure is much more meaningful to investigate risk return trade off.