Risk has many different meanings, but in this article, we are talking about Risk Criteria. Risk Criteria is the idea of looking at 3 main factors when deciding where to invest your money. These criteria are Risk (expected volatility), Return (expected Return), and Risk-return Tradeoff (the relationship between the both of them). We will go into detail about each one below:
1) Risk – The expected volatility of an investment; how much it can fluctuate up or down over time. By comparing Risk in different investments, you can determine which investment is best for your particular situation. There are many ways to compare Risk across different assets, but the Sharpe Ratio is probably one of the most well-known measures of risk-adjusted-performance.
2) Return – The amount of profit you may expect from an investment over a given period of time. Risk and Return go hand in hand, but Risk must be compared to something. Risk-adjusted returns help us make better comparisons of Risk by comparing it with the Return you expect from an investment.
3) Risk-return Tradeoff – It means that as risk increases, returns tend to increase. However, there is a point at which the relationship between Risk and Return reverses, so increasing Risk does not necessarily lead to a higher expected return (and vice versa).
In conclusion, Risk Criteria are an important factor to consider when deciding where to invest. Risk and Return go hand in hand, but Risk must be compared to something!