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 ?
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.
Third, in innovating business models, some well-known risk management tools can be applied to identify and evaluate the right risk-return tradeoffs.
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.
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.
The fact that this unexpected major crisis occurred in Mexico, in spite of its close link with the United States, has led to a serious reconsideration of the risk-return tradeoff of portfolio investment in developing economies.
This combination of NumeriX's advanced pricing capabilities with the flexibility and scalability of Algorithmics' enterprise risk management solution will provide our customers with powerful insights into the risk-return tradeoffs associated with advanced products at the transaction and multi-asset portfolio level.