What Is the High- & Low-Risk Return In the Stock Market?
Every investor has a different amount of risk they are willing to take in the stock market, and various securities have been designed to meet these needs.
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Risk/Return Relationship
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To gain a higher return on a stock an investor must be willing to accept a higher risk. Ideally, investors want to maximize their returns and minimize their risk.
Risk-Free Rate of Return
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T-bills have the lowest risk in the market because their returns keep pace with inflation. If a company wants to encourage investors to buy its stocks, it must offer at least the rate of return on T-bills.
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Beta Risk Measurement
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Beta links the risk of a particular security with the whole market. CSI Global Education indicates beta "measures the degree to which individual stocks tend to move up and down with the market." A security that has a higher beta will have a higher risk.
Multiple Stocks
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Investing in multiple stocks brings its own risk and return considerations as an investor must consider how securities relate to each other and how it will affect his total risk and return.
Correlation
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If two stocks are perfectly positively correlated with each other, meaning that their returns rise and fall at the same time, the investor has not reduced his risk. If the investor invests in two stocks whose returns move in opposite directions where when one rises, the other falls, then the stocks are negatively correlated and this reduces risk.
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