High-risk High return is one of the laws in finance, what does that law really mean? Is there a way of breaking up this law? Explain?
Risk-Return trade off is the theory which explains that greater is the risk of investing in a particular asset greater is the potential of earning high return. Thus, investors could accept high returns only if they accept higher possibility of losses. Several factors which affect the risk and the expected return are the investment objective, risk taking ability and the time horizon.
One of the most common way of assessing risk is the standard deviation of an asset. Higher is the standard deviation, greater is the deviation of returns from its mean over a given time period. Therefore, if an investor has low risk appetite, appropriate instrument for his investment could be Treasuries and government bonds. On the other hand, high risk individuals will choose high yielding bonds or other instruments such as equities for their investment.
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