What is Risk-Return Trade-Off: In-Depth Study

Financial decisions incur a different degree of risk. If someone invests his money in government bonds has less risk as the interest rate is known and the risk of default is very very less. On the other side, you would incur more risk if you decide to invest your money in shares, as the return is not certain. However, you can expect a lower return from government bond and higher from shares.

From the given table you can find out the risk and expected return of different types of investments. As risk is levelling up expected return from that particular investment also increasing. This is called the Risk-Return Trade-off.

If we show you this Risk-Return Trade-Off by a graphical representation then it will look like below. Here, you can see at the lowest point “Government Bond” is situating, where risk is zero and return is minimum. After that “Corporate Bond” where both are medium and in “Share or Stock” risk and return both is higher than the corporate bond.

A proper balance between Risk and Return should be maintained to maximize the market value of the firm’s share. That balance is called Risk-Return Trade-Off and in every financial decision, this trade-off is always been considered.

To see more: https://www.fin2learn.com/2019/12/risk-return-trade-off.html

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