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 ?
Figure 2 illustrates the basic risk-return trade off faced by the hedger.
At current market levels, India offers the most attractive risk-return trade off. Even with 6-7% GDP growth, India remains the second fastest growing economy in the world.
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.
Campbell (1987), Harvey (1991), and Whitelaw (1994) used instrumental variable specification for conditional moments and found mixed results on the risk-return trade off. Pagan and Hong (1991) used non-parametric techniques and found a weak negative relationship, but Harrison and Zhang (1999) found the relationship is significantly positive at longer horizons.
"This will play out over time and liquidity will return to normal when investors have a better understanding of the risk-return trade off."
This paper is the first attempt to examine the linkages between risk-return trade off based on value based performance measurements.
(2009) analyzed the impact of Foreign Total Investor Allocation as a sorting procedure on risk-return trade off and reported highly significant relation based on monthly data (6).
In the context of the paper, we classify three main streams of hypotheses: Hypotheses regarding to test linearity under the objective of risk-return trade off (i) when sorting factor is a traditional measures; (ii) when sorting factor is a recently popularized measure; and, (iii) when sorting factor is a theoretically sound measure.
pension funds, and many of the same conclusions, and debates, carry through: for example, as to whether fund managers invest efficiently given risk-return trade offs, and as to whether they adopt too "short-term" a perspective in assessing company performance.