risk-return trade-off Definition | Business Dictionaries from AllBusiness.com
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Business Definition for: risk-return trade-off
risk-return trade-off

the concept that the higher the return o yield, the larger the risk; or vice versa. All financial decisions involve some sort of risk-return trade-off. The greater the risk associated with any financial decision, the greater the return expected from it. Proper assessment and balance of the various risk-return trade-offs available is part of creating a sound financial and investment plan. For example, the less inventory a firm keeps, the higher the expected return (since less of the firm's current assets is tied up). But there is also a greater risk of running out of stock and thus losing potential revenue. In an investment arena, you must compare the expected return from a given investment with the risk associated with it. Generally speaking, the higher the risk undertaken, the more ample the return; conversely, the lower the risk, the more modest the return. In the case of investing in stock, you would demand higher return from a speculative stock to compensate for the higher level of risk. On the other hand, U.S. T-bills have minimal risk so a low return is appropriate. The proper assessment and balance of the various risk-return trade-offs is part of creating a sound investment plan.

risk-return trade-off

concept, basic in investment management,that risk equals (varies with) return ; in other words, the higher the return the greater the risk and vice versa. In practice, it means that a speculative investment, such as stock in a newly formed company, can be expected to provide a higher potential return than a more conservative investment, such as blue chip or a bond . Conversely, if you don't want the risk, don't expect the return.

See also portfolio theory
risk-return trade-off

concept, basic in investment management, that risk equals (varies with) return : in other words, the higher the return, the greater the risk, and vice versa. In practice, this means that a speculative investment, such as stock in a newly formed company, can be expected to provide a higher potential return than a more conservative investment.

Copyright © 2005, 2000, 1995, 1987 by Barron's Educational Series, Inc., Reprinted by arrangement with Publisher.
Copyright © 2006, 2003, 1998, 1995, 1991, 1987, 1985 by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.
Copyright © 2007, 2000, 1997, 1987, by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.

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