Final answer:
The ratio illustrating the balance between potential risk and the expected return on investment is known as the risk-return tradeoff. Investors choose between lower risk with lower returns and higher risk with the expectation of higher returns, based on personal preferences and time frames for investment.
Step-by-step explanation:
The ratio that is based on the principle that a high-risk investment should generate higher financial returns for a business, and more conservative decisions often generate lesser returns, is known as the risk-return tradeoff.
Financial investors often face the dilemma of choosing between safe investments with lower returns or riskier ones with potentially higher returns. This decision-making process is influenced by personal preferences, as well as the examination of risk and return in the context of different time frames. The principle behind this is simple: to justify taking on additional risk, an investor expects to be compensated with higher returns. Investments like bank accounts carry lower risks but offer minimal returns, while stocks, being riskier, have the potential for higher returns. If stocks and other high-risk assets did not promise higher returns, they would have little appeal to investors.
Furthermore, throughout history, there are numerous instances where high-risk levels have been detrimental to investors' portfolios. Thus, the balance between risk and return remains a fundamental aspect of investment strategy.