Why do risk and return go hand in hand?

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pohnpei397 eNotes educator| Certified Educator

Risk and return go hand in hand because the riskier investments do not attract as many investors.  Therefore, they have to offer greater rewards to those who do invest in them.  If a particular investment is not very risky, many people will be willing to invest in it.  But because there is so much demand for the investment, it does not need to offer that much in the way of returns.  People will invest in it even if the returns are low because they are relatively sure of making money.  If, by contrast, there is a high risk of losing money, fewer people will want to invest.  The demand for that investment is lower and therefore the entity selling the investment needs to offer a great deal of return in the event that the investment does pan out.