Question

What rule is important to remember when evaluating risk and return? The higher the risk, the higher the potential return. The higher the risk, the lower the potential return. The lower the risk, the higher the potential return. There is no connection between risk and return.

Answer 1

The correct answer is A.

Answer 2

Answer: The higher the risk, the higher the return.

Returns from an investment refers to the gains or losses over a specified period, and is quoted as percentage.

Risk refers to the possibility or the chance that the actual return that is earned is greater than or less than the return expected by the investor. Thus, uncertainty is another name for risk.

If the returns from an investment are certain, the risk involved is low. When risk is low, the returns are also low. For e.g. the return from a T-bill is low because the risk of default is zero, since the government can print money to fund its debt.

The higher the level of risk involved, the greater the potential for a higher return.