Question

define risk and return and discuss the ralationship between them.

Answer 1

Solution :

Risk : risk is the probabilitu of loss that a person may incur on his investment. For example we give loan to any person then there is a risk that we will not get our money back. However quantum of risk vary with each investment. For e.g. in invest in government bond then this is risk free investment or say zero risk investment. On the other hand, if we invest in future/options, there is higher risk of losing money in these investments.

Return : Return is the earnings that we realize on the investment. For example, if we invest in government bond then we get interest on these bond. These interest income is our return on investment.

There is direct relationship between risk and return. If risk is higher then return will also be higher. If risk is lower then return is also on lower side. Therefore risk and return are positively co-related.