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The relationship between risk and return is often represented by a trade-off. In general, the more risk you take on, the greater your possible return. Think of lottery tickets, for example.
The lowest of all is the risk-free rate of return. The risk-free rate has zero risk (most modern major governments will inflate and monetise their debts rather than default upon them), but the return is positive because there is still both the time-preference and inflation premium components of minimum expected rates of return that must be met ...
Example investment portfolio with a diverse asset allocation. Asset allocation is the implementation of an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor's risk tolerance, goals and investment time frame. [1]
The return - standard deviation space is sometimes called the space of 'expected return vs risk'. Every possible combination of risky assets, can be plotted in this risk-expected return space, and the collection of all such possible portfolios defines a region in this space.
The risk-return ratio is then defined and measured, for a specific time period, as: = / Note that dividing a percentage numerator by a percentage denominator renders a single number. This RRR number is a measure of the return in terms of risk.
Risk management strives to lessen the risk of a project or investment while earning the highest return possible. The technique’s goal is to solve the mismatches between assets and liabilities.
The Sortino ratio measures the risk-adjusted return of an investment asset, portfolio, or strategy. [1] It is a modification of the Sharpe ratio but penalizes only those returns falling below a user-specified target or required rate of return, while the Sharpe ratio penalizes both upside and downside volatility equally.
With this measure in place, the expected, i.e. required, return of any security (or portfolio) will then equal the risk-free return, plus an "adjustment for risk", [6] i.e. a security-specific risk premium, compensating for the extent to which its cashflows are unpredictable. All pricing models are then essentially variants of this, given ...