The Risk is the probability that the actual return will be different from the expected return, it could be higher or it could be lower. If the risk is low there is a chance that the investor could lose a small amount of their money and on the flip side if the risk is higher there is a chance that the investor could lose most or all of their money.
The Return is simply the profit that is made on an investment. So in investing we have a trade-off between risk and return. This trade-off is proportional to an increase/decrease of risk, to increase/decrease return. Normally the higher the risk, the higher the return and the lower the risk, the lower the return will be. An investor usually wants to have the highest rate of return for the lowest amount of risk.
If the investment is at a higher risk it does not mean that it will yield a higher return. The risk/return trade-off only indicates that there is a possibility of higher returns. There are no guarantees that a higher risk investment will yield a higher return and this also means a higher potential for loss.
Determining what level of risk is appropriate depends on various aspects. Risk differs from person to person and depends on your goals, income and personal situations to name a few. It is also important to take time into consideration when investing. In the final blog of this series we will be looking at timing in the market.
Author Ben Charlton
Edited by N Du Preez (Business Internet Marketing Solutions)