Question

High risk should produce high returns. Illustrate this concept with a real life example of junk bonds that actually generated high returns for investors.  

Answer 1

Risk and Return always work in the same direction. Risk is the future deviation of expected earnings and return is the reward of accepting that risk.

Higher risk= Higher return

Lower risk =Lower return

Junk Bonds: It is a corporate bond and fixed income instrument, it provides high risk and high return. Company’s which issues Junk Bonds provides higher return as compared to other bonds to compensate additional risk of Junk Bonds. Junk Bonds are generally issued by Companies which are not physically sound, so companies which issues junk bonds provides higher returns to its investors .