Final answer:
The expected rate of return is the forecasted return on an investment, while the actual rate of return is what is really earned or lost. Risk indicates the uncertainty of returns and includes different types, such as default and interest rate risks. High-risk investments have greater fluctuations in actual returns compared to their expected returns.
Step-by-step explanation:
The difference between the expected rate of return and the actual rate of return is referred to as the unexpected gain or loss. The expected rate of return is an estimate of the potential returns of an investment. It is usually calculated as an average percentage return over a period and includes capital gains, interest payments, or increased profitability from an investment.
Risk is associated with the uncertainty and the spectrum of returns possible for an investment. This includes the risk of receiving returns much lower or higher than the expected rate, such as default risk and interest rate risk. On the other hand, the actual rate of return is the actual gain or loss realized from an investment, inclusive of interest payments and capital gains after a given period.
Investments with high risk tend to have a wide range of potential returns, which could significantly deviate from the expected rate of return. Conversely, low-risk investments generally have actual returns that closely match the expected rate. Understanding the difference between expected and actual returns, as well as handling the risk, is essential for managing investments effectively.