Concept Of Risk and Return

Risk and return is a simple concept that gives a general guide on how much an investment can profit or lose. Basically, the more risk taken in an investment, the higher chance of a higher return. An investment with minimal risk is a safer investment with near minimal losses occuring, but at the same time, there is minimal gain. On the opposite end of the risk/return spectrum there are high risk investments, where the investment can be unstable and there could be high losses or high gains.

There are several common types of investments which each carry a different levels of risk. Secure investments such as fixed term deposits or placing money in the bank and accumalating interest over time is a low risk investment. In these types of low risks investments, there is typically inflation risk, where as the money you currently have will be worth less in the future, eroded where inflation exceeds the interest paid.  Inflation decreases the purchasing power of money held in deposits. For these types of investments, it is best to keep low sums of money in them or keeping them short term.

On the other end we have high risk investments such as shares. Shares can be highly volatile and very unpredictable. Although this is the case, the can gain high returns because of their ability to change prices very quickly. This also means they have a chance of losing money as well. 

The graph below outlines four types of investments and the relationship between their risk and return: