What is the ‘Risk-Return Trade-off’: The risk-return trade-off is the principle that potential return rises with an increase in risk. Low levels of uncertainty or risk are associated with low potential returns, whereas high levels of uncertainty or risk are associated with high potential returns. According to the risk-return tradeoff, invested money can render higher profits only if the investor is willing to accept the possibility of losses.
- BREAKING DOWN ‘Risk-Return Tradeoff’ The appropriate risk-return trade-off depends on a variety of factors including risk tolerance, years to retirement and the potential to replace lost funds. Time can also play an essential role in determining a portfolio with the appropriate levels of risk and reward. For example, the ability to invest in equities over the long-term provides the potential to recover from the risks of bear markets and participate in bull markets, while a short time frame makes equities a higher risk proposition.