Understanding Risk and Return

Abstract

Any financial asset is characterized by its risk and return. Return means the financial reward it brings, such as the percentage increase in the asset value. We hope to maximize the percentage return of the asset as much as possible. However, a higher reward often comes with higher risk, where risk refers to the volatility of such return. That is, an asset displays high oscillations in its historical returns, making its future outlook more uncertain than, say, a stable product with little deviation from the expected gain, such as the bond. As an investor, the goal of making profits boils down to maximizing the return and, at the same time, minimizing the risk.