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Relationship between Risk and Return

To know relationship between risk and return may be main topic of any investor because investor is always interest (zest) to get high return at low risk. But if he succeeds to quantify the relationship and its direction, he can manage his investment with better way.


Our aim to discuss this concept is to explain what type of relationship between risk and return may happen.

Relationship between risk and return means to study the effect of both elements on each other. We measures the effect of increase or decrease risk on return of investment. Following is the main type of  relationship of risk and return

Risk-Return relationship model

1. Direct Relationship between Risk and Return

(A) High Risk - High Return 

According to this type of relationship, if investor will take more risk, he will get more reward. So, he invested million, it means his risk of loss is million dollar. Suppose, he is earning 10% return. It means, his return is Lakh but he invests more million, it means his risk of loss of money is million. Now, he will get Lakh return.

(B) Low Risk - Low Return 

It is also direct relationship between risk and return. If investor decreases investment. It means, he is decreasing his risk of loss, at that time, his return will also decrease.

2. Negative Relationship between Risk and Return

(A) High Risk Low Return

Sometime, investor increases investment amount for getting high return but with increasing return, he faces low return because it is nature of that project. There is no benefit to increase investment in such project. Suppose, there are 1,00,000 lotteries in which you will earn the prize of You have bought 50% of total lotteries. But, if you buy 75% of lotteries. Prize will same but at increasing of risk, your return will decrease.

(B) Low Risk High Return 

There are some projects, if you invest low amount, you can earn high return. For example, Govt. of India need money. Because, govt. needs this money in emergency and Govt. is giving high return on small investment. If you get this opportunity and invest your money, you will get high return on your small risk of loss of money.

Related : Financial Management 

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Accounting Education: Relationship between Risk and Return
Relationship between Risk and Return
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Accounting Education
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