Investing and Global Finance News

The Risk-Reward Tradeoff

The Risk-Reward Tradeoff involves understanding the amount of risk that you are willing take in investing.

The general rule is that an investor makes riskier investments in order to get higher rewards (i.e. earn more money). Low risk investments generally are expected to produce low level returns. High risk investments hopefully offer a high level of returns.

For example, the lowest risk investments are usually treasury bonds because the government almost never defaults on loans. Today, for example, one can earn 2% interest on treasury bonds. However, if the index funds, such as the S&P 500 returns 10% then why not go for the higher return investment? The answer is that the return is based on the risk. Index funds vary in yearly returns from -5% to +25%. In this case, the risk-reward tradeoff is much greater.

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