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 ?
Thus, the Modigliani-Miller arbitrage process must be relied upon to support investors' indifference across the observed risk-return tradeoffs, but, as noted above, this process is suspect.
By addressing these threats and carefully considering risk-return tradeoffs, any organization can elevate risk management to the boardroom level and use it as a tool to innovate, rather than simply manage.
Risk appetite is the total exposed amount that an organization wishes to undertake on the basis of risk-return tradeoffs for one or more desired and expected outcomes.
But once clients move beyond guaranteed accounts--an option they'll probably have to examine--they encounter different risk-return tradeoffs.
But once clients move beyond guaranteed accounts -- an option they'll probably have to examine -- they encounter different risk-return tradeoffs.
The second part reviews research regarding the unique contractual features and characteristics of hedge funds and their influence on the risk-return tradeoffs. The third part reviews the role of hedge funds in a portfolio including the extent of diversification benefits and limitations of standard mean-variance framework for asset allocation.
However, building an investment portfolio that is right for you involves matching the risk-return tradeoffs of various asset classes to your unique investment profile.
However, since firms constantly face risk-return tradeoffs, why should we bother to help firms by reducing the level of risk?
The Mexican crisis has led to a more realistic assessment of the risk-return tradeoffs of foreign portfolio investment in those areas of the world.
One promising framework, which draws on techniques and concepts from actuarial science and financial economics, not only provides the ability to quantify market value but can also drive greater consistency in assessing risk-return tradeoffs across a range of risk management efforts.
The second part of the paper covers research regarding the unique contractual features and characteristics of hedge funds and their influence on the risk-return tradeoffs. The third part of the paper reviews the research on the role of hedge funds in a portfolio including the extent of diversification benefits and limitations of standard mean-variance framework for asset allocation.
Risk assessment and measurement methodologies, such as risk mapping, value-at-risk, economic capital and risk-adjusted return on capital (RAROC), provide management with better information on critical risk exposures as well as risk-return tradeoffs. These methodologies, together with early warning indicators, represent a whole new risk measurement toolkit that is much more forward-looking than traditional risk measures that included losses, error rates and incident occurrences.