| Definition |
The possibility of losing some or all of the original investment. |
The profit or income generated from an investment. |
| Nature |
Uncertainty and potential negative outcomes. |
Positive gain or benefit from an investment. |
| Measurement |
Measured by volatility, standard deviation, beta, or downside risk. |
Measured by percentage gain, yield, dividends, or capital appreciation. |
| Relationship |
Higher risk usually demands higher expected returns. |
Higher returns are generally associated with higher risk. |
| Investor Focus |
Focuses on protecting capital and minimizing losses. |
Focuses on maximizing gains and wealth creation. |
| Types |
Market risk, credit risk, liquidity risk, inflation risk, etc. |
Capital gains, dividends, interest income, rental income. |
| Control |
Partially controllable by diversification and asset allocation. |
Depends on market conditions and investment choices. |
| Time Horizon |
Risk perception changes over short vs long term investments. |
Returns accumulate and compound over time. |
| Impact of Volatility |
High volatility indicates higher risk. |
Volatility can create opportunities for higher returns. |
| Investor Behavior |
Risk-averse investors prefer safer assets. |
Risk-tolerant investors seek higher returns. |
| Measurement Units |
Percentage of possible loss or variability. |
Percentage gain over the investment cost or time. |
| Examples |
Stock price decline, default risk, market crashes. |
Dividend payouts, stock price appreciation, interest earned. |
| Uncertainty |
Always present; risk involves unknown outcomes. |
Expected returns are estimates, actual returns may vary. |
| Risk-Free Investment |
Treasury bills and government bonds have minimal risk. |
Returns are low but stable and predictable. |
| Trade-off |
Investors must balance risk with desired returns. |
Higher returns usually come with accepting higher risk. |
| Impact on Portfolio |
Risk affects asset allocation and diversification decisions. |
Return drives portfolio growth and wealth accumulation. |
| Emotional Response |
Fear and caution due to potential losses. |
Greed and optimism due to potential gains. |
| Long-Term Effect |
Risk can erode capital if unmanaged. |
Consistent returns grow wealth over time. |
| Examples of Low Risk/Low Return |
Fixed deposits, government bonds. |
Interest income from FD or bonds. |
| Examples of High Risk/High Return |
Equities, commodities, cryptocurrencies. |
Capital appreciation in stocks or digital assets. |
| Investor Goal |
Protect capital and limit downside. |
Maximize wealth and achieve financial goals. |
| Decision Making |
Risk assessment guides investment selection. |
Return expectations motivate investment choices. |
| Volatility |
Indicator of risk; fluctuations in asset prices. |
Volatility can create opportunities for returns. |
| Example Periods |
2008 financial crisis showed extreme risk. |
Post-2008 recovery showed strong returns. |
risk vs return