Which statement best reflects the relationship between risk and return in investing?

The relationship between risk and return in investing is a fundamental concept in finance, which indicates that higher potential returns are typically associated with higher risk. When investors allocate funds to investments that carry a higher level of uncertainty—such as stocks, real estate, or new ventures—they do so with the understanding that, while their chances of experiencing significant gains are elevated, they also face a greater likelihood of losses.

This principle stems from the idea that in a competitive market, investors seek to be compensated for taking on additional risk. Thus, those willing to invest in riskier assets expect to earn a higher return as a reward for that risk. Conversely, safer investments, such as government bonds or savings accounts, generally offer lower returns because they pose less risk to the investor’s principal.

By recognizing this dynamic between risk and return, investors can make informed choices that align with their financial goals and risk tolerance levels. This understanding helps them navigate their investment decisions more effectively, balancing potential growth against the possibility of loss.