Correct Answer:
C. High risk high return
The risk-return tradeoff is a core principle in finance stating that potential return rises with an increase in risk. Investors demand higher compensation for taking on greater risk.
- The correct answer, High risk high return, encapsulates this principle. To entice investors to undertake investments with higher levels of uncertainty or potential for loss, those investments must offer the prospect of significantly greater returns.
- High risk low return (A) contradicts this fundamental principle, as investors would avoid such investments.
- Low risk high return (B) is generally an unrealistic scenario in efficient markets, often referred to as a 'free lunch' that doesn't exist.
- No relation (D) is incorrect because there is a well-established positive correlation between risk and expected return in financial markets.
Understanding this tradeoff is crucial for making informed investment decisions.