Which of the following best describes the relationship between risk and return in investments?

• A. Higher risk is generally associated with higher potential return.
• B. There is no relationship between risk and return.
• C. Higher risk is generally associated with lower potential return.
• D. Lower risk always guarantees higher return.

Answer: (A)

Verified step by step guidance

1. Understand the concept of risk and return: Risk refers to the uncertainty or potential for loss in an investment, while return refers to the profit or gain earned from the investment.
2. Learn the general principle in finance: Higher risk is typically associated with higher potential returns because investors demand greater compensation for taking on more uncertainty.
3. Evaluate the options provided: Analyze each statement to determine which aligns with the principle of risk and return.
4. Option 1: 'Higher risk is generally associated with higher potential return' aligns with the principle that investors expect higher returns for taking on greater risk.
5. Option 2, 3, and 4: These statements contradict the established relationship between risk and return, as they either deny the relationship or misrepresent it.