Risk and return: What’s the relationship?

Whenever you make an investment, you face a certain level of risk in pursuit of potential profits. Risk is therefore an element

that is fundamental to the investment equation and should be taken into account when making any investment decision.

The greater the likelihood of a loss, the riskier the investment, and vice versa. The return on an investment is what you, as an investor, expect to receive

the money invested (assets or capital). You should also know that an investment carrying a high level of risk would naturally be expected to offer

a high return. In other words, the relationship between expected return and risk is a direct one.

Investment risk has more than one definition. It can mean the possibility that an investor will fail to achieve the expected return on an investment, or uncertainty about

the amount of future cash flows it will generate, as well as the volatility of the expected return or the degree to which the actual return differs from what was expected. Each person deals

People view risk differently, because some are more willing to take risks than others.

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What type of investor are you?

In general, the younger you are, the more able you are to tolerate investment risk. That’s because you have time to wait for your investments to recover

The situation described above can occur when markets decline. However, if you are retired or nearing retirement, you may have planned to rely on the income generated by

This may make you more inclined to avoid the risk of losing your principal, even if it means exposing yourself to greater inflation risk.

Your life circumstances also affect how much risk you’re willing to take. If you have children who will be going to college in the next few years

or elderly parents who depend on you financially, you may need more stability and may want to choose lower-risk investments with steady returns, at least until

You can cover those expenses.

Your personality also plays an important role. Most experts agree that it’s not helpful to invest your money in areas that make you so nervous that

you can’t sleep or cause you to panic-sell at the first signs of a downturn. However, if you’re uncomfortable, they also encourage you

to learn more about the returns from long-term investments to help you accept an appropriate level of risk.

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There are three types of investors:

1- A conservative investor is someone who doesn’t want to take on significant risk and is content with modest gains and profits.

2- A risk-seeking investor is willing to take on a high level of risk in pursuit of substantial profits and gains.

3- A moderate investor is willing to take on a moderate level of risk in pursuit of moderate profits and gains.

To find out what type of investor you are, you can take a simple test. Just answer the following question: Imagine you invested your money

in an investment with a high return but a high level of risk. Would you be able to relax and sleep soundly?

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 *إذا كانت إجابتك “نعم”: إذن فأنت مستثمر مخاطر.

*If your answer is “no,” you are a conservative investor.

*If your answer is “Somewhat,” you are a moderate investor.