When the investor want to invest his money at a higher rate of return
there is a higher factor of risk. As we would be exposing our money
to the markets (equity, debt, etc.) and their associated risks.
Further, the higher the risk taken, the higher is the expected
return. In the bank the money is exposed to no risk, so the return is
just at about the inflation rate. In contrast the risk in equity
markets is the highest, and the expected returns would also be the
highest. Before exposing ourselves to the markets, we can apply
common sense and our learning to reduce this risk to acceptable
levels.
There are 5 economic factors that affect equity returns, which can be
classified under the 4 types of investment risk.
A further exposition for a better understanding maybe read at:
http://www.narachinvestment.com/risk_and_return.htm
(You may click on the link above or type the complete URL address into
your browser)
