The Risk-Return Tradeoff is a fundamental principle in investing, which states that there is a relationship between the level of risk an investor is willing to take on and the potential return they can expect to receive. In general, investments with higher levels of risk are expected to offer higher potential returns, while investments with lower levels of risk are expected to offer lower potential returns.This tradeoff exists because investors require compensation for taking on the additional risk of investing in a particular asset. The potential return on an investment represents this compensation, and is generally higher for assets that are riskier.For example, stocks are considered to be riskier investments than bonds, because the value of stocks can fluctuate significantly due to changes in market conditions and investor sentiment. As a result, stocks are typically expected to offer higher potential returns than bonds.Understanding the risk-return tradeoff is an important consideration for investors when making investment decisions. It helps investors to balance the potential returns they hope to earn with the level of risk they are comfortable taking on.
