Grade 2 Lesson 5: Risk vs. Return
#risk vs. #return is a key concept in #finance and #investing. At the most basic level, this concept states that an #investment that has a #higherrisk could have a higher possible return. Thus, if someone wants to earn a higher return, they would need to take a higher risk, which means that they would need to be prepared for a higher possibility of #losses.
Let's explore this in the context of 2 key investment classes - #stocks vs. #bonds. Out of the 2, stocks are more volatile and therefore are considered risky. Investment in #shares has a potential for a higher return i.e. ~10%+a year on average.
On the other hand, bonds are less #volatile and are therefore considered less #risky. So, #investments in bonds have a lower return.
It is not true that #higherrisk investments will always give a higher return. Higher-risk investments have a POTENTIAL for a higher return. But in some cases, the return could be low or negative too. Returns in higher-risk investments are not guaranteed. But we have seen that over the long term, the higher-risk investments typically do give a higher return.
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