Finance functions in a two-parameter world of risk and return. Define

Finance functions in a two-parameter world of risk and return. Define risk and return in a financial sense and discuss how these two concepts are “joined at the hip.”

What will be an ideal response?

ANSWER

Answer: Investors desire to maximize return and minimize risk. Or put another way, they want to get the most out of their investments with the least amount of uncertainty. However, there is a direct trade-off between risk and expected return. In order for investors to increase their expected return, they must be willing to bear greater risk or uncertainty. You cannot have one without the other; thus risk and return are “joined at the hip,” so to speak.