Question

Investors sometimes fear that a high-risk investment is especially likely to have low returns. Is this fear true? Does a high risk mean the return must be low?

Short answer

A higher chance of a higher return is associated with more risk, whereas a lower probability of a lower return is associated with a lower probability of a lower return. When making investing selections, an investor must make a risk-return trade-off.

Step-by-step solution

Concept introduction

Average return is a basic mathematical average of a series of returns generated over a period of time.

Explanation of solution

A high risk investment does not have to have a low return; yet, a high risk investment may have a low return. The terms "return" and "risk" are frequently misunderstood.

Risk denotes the possibility of a wide range of outcomes. A high-risk investment must be expected to yield a high return, or else no one will accept the risk. There's a chance that a high-risk investment will yield a low return. An investment has a high projected return because it also has a high risk associated with it.