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 ?
The new fund seeks to leverage the high growth potential of these rapidly expanding companies and provides greater diversification and risk-return tradeoff.
"The Fund leverages the high growth potential of these rapidly-expanding companies and provides greater diversification and risk-return tradeoff," Manulife said.
Alternatively, Fitch could remove the Negative Rating Watch and assign a Negative Rating Outlook if it concludes that the planned risk-return tradeoff is appropriate, but execution risk associated with affecting the planned changes remains elevated.
However, there are a number of factors which suggest a better risk-return tradeoff for China than for other creditors: Trade benefits: BRI projects will likely make the recipient countries more likely to trade with China (and use the renminbi), bringing economic benefits beyond the project itself.
The first, he maintained, "is the risk-return tradeoff. Because most investors are risk averse, riskier securities accordingly offer higher returns.
If factor models reflect a risk-return tradeoff, they shouldn't be affected by the activities of academics.
(8) Thus, the MM II result requires that investors are indifferent between the risk-return tradeoff existing at each level of leverage.
Paragraph 71 states, "In risk transfers between associated enterprises, the risk-return tradeoff should not be used on its own to justify the appropriateness of any risk transfer.
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. Whether the hedger considers these incremental costs acceptable or not depends upon the hedger's degree of risk aversion.
I estimate the amount of market risk that a public plan must accept to achieve an 8 percent expected return, based on changes in the Treasury yield and estimates from economists at the Office of the Comptroller of the Currency of the risk-return tradeoff (the "Sharpe Ratio") for public plan investments.
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.