The principle of risk-return trade-off means that
A) higher risk investments must earn higher returns.
B) an investor who takes more risk will earn a higher return.
C) a rational investor will only take on higher risk if he expects a higher return.
D) an investor who bought stock in a small corporation five years ago has more money than an investor who bought U.S. Treasury bonds five years ago.

Question

Quizplus · Accepted Answer

The principle of risk-return trade-off states that a rational investor will only take on higher risk if he expects a higher return. This means that there is a positive relationship between risk and expected return. Option A is incorrect because it is not a requirement that higher-risk investments must earn higher returns. Option B is incorrect because taking on more risk does not guarantee a higher return. Option D is incorrect because the comparison between investing in a small corporation and buying Treasury bonds does not necessarily reflect the principle of risk-return trade-off.

The Principle of Risk-Return Trade-Off Means That