Understanding the Risk-Reward Spectrum
In uncertain markets, investors may hold larger than usual amounts of cash. Incremental “step-ups” in risk can potentially enhance returns while still managing volatility.
What this chart shows
Financial assets have unique risk-reward profiles. While cash carries the least risk, it also has the lowest return potential. Depending on their risk tolerance, investors can also look to bonds and equities for greater income or capital appreciation potential.
What it means for investors
No investment is truly risk free. While cash protects principal, it is subject to inflation risk and its low returns may hinder you from reaching your financial objectives. You can step up your reward potential by prudently diversifying into riskier assets, which can help mitigate volatility while also keeping goals on course. However, it cannot assure a profit or protect against loss.
The Relationship Between Risk and Reward
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