Personal Finance 1st Edition by Jack R. Kapoor

Exercise 3

1. In your own words, describe the risk–return trade-off.

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2. What are the five components of the risk factor?

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3. How do income, growth, and liquidity affect the choice of an investment?

Action Application Using Internet research and discussion with other people, determine if you prefer less risk and conservative investments or more risk and speculative investments. Explain your answer.

Step 1 of 3

1. Simply put, one basic rule sums up the relationship between the factors of safety and risk (and the risk-return tradeoff): The potential return on any investment should be directly related to the risk the investor assumes. When investing, not everyone has the same tolerance for risk. In fact, some people may actually be risk averse. Typically, a risk averse investor will seek investment alternatives that offer the least risk. When people choose investments that have a higher degree of risk, they expect larger returns.