alleryStart learning →What does the risk-return trade-off hold?
AThe lower the risk, the greater the required return
BThe higher the risk, the greater the required return
CThe higher the risk, the smaller the required return
DThe level of risk has no bearing on the return
Answer & Solution
Correct answer: B. The higher the risk, the greater the required return
1. In finance, return is the opportunity for profit.
2. Risk is the potential for loss, or the chance that an investment will not achieve the expected level of return.
3. The basic principle is that the higher the risk, the greater the return that is required.
4. Financial managers weigh many risk and return factors, among them market demand, interest rates, general economic conditions and social issues.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 16 "Understanding Financial Management and Securities Markets", section 16.1 The Role of Finance and the Financial Manager_
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