First is the principle that risk and return are directly related. The greater the risk that an investment may lose money, the greater its potential for providing a substantial return. By the same token, the smaller the risk an investment poses, the smaller the potential return it will provide.
The correlation coefficient is a statistical measure of the strength of a linear relationship between two variables. Its values can range from -1 to 1. A correlation coefficient of -1 describes a perfect negative, or inverse, correlation, with values in one series rising as those in the other decline, and vice versa.
Explanation: In the field of finance and investments, risks and returns are positively correlated. This means that generally, as risk increases, potential returns also increase. The logic behind this correlation is that investors require higher returns to compensate for taking on more risk.
Correlation is a statistical term describing the degree to which two variables move in coordination with one another. If the two variables move in the same direction, then those variables are said to have a positive correlation. If they move in opposite directions, then they have a negative correlation.
The correlation between the return on two assets O will always have a value between - 1.0 and -1.0. O measures the relative relationship between the returns of pair of assets. O is calculated by dividing the covariance of returns by the product of the standard deviations of the returns for the two assets.
Difference between risk and return
The return you get is a reward for the high risk you were willing to take. On the contrary, if an investment is considered low-risk or extremely safe, it generally leads to lower returns. This is because the market does not reward low-risk investments with substantial profits.
Answer: The relationship between risk and return is directly proportional. Higher risks give higher returns and vice versa.
The appropriate answer to the question is Option A: direct. In the context of investing, a direct or positive correlation means that as the level of risk increases, the potential for higher returns also increases. Conversely, lower-risk investments tend to offer lower expected returns.
A positive correlation exists between risk and return: the greater the risk, the higher the potential for profit or loss. Using the risk-reward tradeoff principle, low levels of uncertainty (risk) are associated with low returns and high levels of uncertainty with high returns.
Risk-return tradeoff is the trading principle that links risk with reward. According to risk-return tradeoff, if the investor is willing to accept a higher possibility of losses, then invested money can render higher profits.
Variance is a measurement of the degree of risk in an investment. Risk reflects the chance that an investment's actual return, or its gain or loss over a specific period, is higher or lower than expected. There is a possibility some, or all, of the investment will be lost.
The formula for correlation is equal to Covariance of return of asset 1 and Covariance of asset 2 / Standard. Deviation of asset 1 and a Standard Deviation of asset 2. Correlation is based on the cause of effect relationship, and there are three kinds of correlation in the study, which is widely used and practiced.
To calculate the risk/return ratio (also known as the risk-reward ratio), you need to divide the amount you stand to lose if your investment does not perform as expected (the risk) by the amount you stand to gain if it does (the reward).
The risk–return spectrum (also called the risk–return tradeoff or risk–reward) is the relationship between the amount of return gained on an investment and the amount of risk undertaken in that investment. The more return sought, the more risk that must be undertaken.
The relationship between risk and return is a foundational principle in financial theory. There is a positive correlation between these two variables, the general rule being “the greater the level of risk, the higher the potential return (or loss respectively).
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Answer and Explanation:
A central implication from modern portfolio theory is that risk and returns are positively correlated. That is, riskier assets on average demand a higher return. This is because investors are risk-averse. For them to bear extra risks, a higher return must be provided.
Key Takeaways. The risk curve is a visual depiction of the tradeoff between risk and return among investments. The curve denotes that lower-risk investments, plotted to the left, will carry lesser expected return; those riskier investments, plotted to the right, will have a greater expected return.
The risk/reward ratio is a key financial metric used to evaluate the potential return of an investment relative to the risk taken. It is calculated by dividing the potential loss by the potential gain, expressed as a ratio (e.g., 1:2). For instance, if you risk Rs. 100 to potentially earn Rs.
The greater the risk, the greater the potential return.
According to the rule of correlation coefficients, the strongest correlation is considered when the value is closest to +1 (positive correlation) or -1 (negative correlation). A positive correlation coefficient indicates that the value of one variable depends on the other variable directly.
The two most frequently used correlation indices are those of Pearson and Spearman: the first one measures the linear relationship between two continuous random variables and is adopted when the data follows a normal distribution while the second one measures any monotonic relationship between two continuous random ...