Over the period 1995-2015, the risk-return relationship appears to be [blank].
A)A)negative.
B)B)perfectly positive.
C)C)random.
D)D)generally positive, but not perfect.

Question

Quizplus · Accepted Answer

The question suggests that we are looking for a relationship between risk and return over a 20-year period. The fact that the question asks for a "risk-return relationship" implies that we are looking for a correlation between the two variables. Since risk and return are generally positively related (i.e., the more risk, the higher the potential return), we can eliminate options A and C. Option B, perfect positive correlation, is unlikely to occur in the real world - there are always other factors at play that can impact an investment's return beyond just its level of risk. That leaves us with option D, which suggests that the risk-return relationship is positive but not perfect. This is in line with what we would expect to see - investments with higher levels of risk tend to have higher potential returns, but there are always other factors that can impact returns as well (e.g., economic conditions, company-specific news, geopolitical risks, etc.).

Over the Period 1995-2015, the Risk-Return Relationship Appears to Be