Please give an example of the principle of risk-return trade-off.

Personal Finance December 08, 2013 Print Friendly and PDF

When investors take more risk with their investments, they generally have the potential for, but not a guarantee of, a higher average return. For example, stocks (and stock mutual funds), which are very volatile in the short term, have historically produced the highest average annual returns of any asset class over the long term. By comparison, cash-equivalent assets, such as money market mutual funds and certificates of deposit, have less risk of loss of principal but generally pay relatively low rates of interest.

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This work is supported by the USDA National Institute of Food and Agriculture, New Technologies for Ag Extension project.