What is Risk-return tradeoff?
Risk-return tradeoff: Higher possible reward comes with higher risk.
Where Risk-return tradeoff fits
Risk-return tradeoff is part of Portfolio & Risk in Stock Market. A portfolio spreads money across asset classes. Diversification, rebalancing and dollar-cost averaging reduce risk, and higher possible return always comes with higher risk.
Practical tip
Match risk to your goal and your timeline.
Related terms
- Portfolio
- The collection of investments someone holds.
- Index fund
- A fund that copies a market index at low cost.
- Volatility
- How sharply a price swings up and down.
- Short selling
- Betting a price will fall by selling borrowed shares first.
- Blue chip
- Shares of large, well-established, reliable companies.
- Diversification
- Spreading money or products across several areas to reduce risk.
- Asset allocation
- How an investor splits money among stocks, bonds and cash.
- Risk tolerance
- How much loss an investor can accept without panicking.
Formulas you will use with it
Test yourself
Which term means: “Higher possible reward comes with higher risk.”?
Risk tolerance · Risk-return tradeoff · Short selling
Answer: Risk-return tradeoff
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