📈 Understanding Risk & Return
Learn how the balance between risk and return defines every investment decision.
Every investment carries risk — the possibility of losing money — and potential return — the profit expected for taking that risk. Investors must balance these forces to achieve their goals.
⚙️ Risk Types
- Systematic Risk: Market-wide factors (inflation, interest rates, wars).
- Unsystematic Risk: Company-specific events like management changes or product recalls.
📊 Measuring Risk
The most common measure of risk is standard deviation, which shows how much returns vary from the average. A higher deviation means higher volatility.
📈 The Risk–Return Tradeoff
Higher potential returns usually come with higher risk. This tradeoff forms the foundation of portfolio theory, where diversification can reduce risk without proportionally reducing returns.