Question

Analyze the relationship between risk and rate of return, and suggest how you would formulate a portfolio that will minimize risk and maximize rate of return.

Answer 1

There is a direct relationship between risk and return. It is often said that the higher the risk, the higher the return because there would be always a higher reward for taking higher risk, so there would always be a higher return for higher risks.

There are various investors who are categorised based on their risk appetite. Investors who want to take higher risk will always be exposed with the scenario of making higher returns and those investors who do not want to take risk will always be exposed to a scenario of earning lower returns.

I would formulate a portfolio by minimising the risk and maximizing the overall rate of return by diversification of the portfolio into various asset classes and various sectors that will neutralize the unsystematic risk and minimise the systematic risk so that return can be maximized and risks can be minimised to a largest possible extend.