Understanding risk and return Understanding the relationship between risk and return is a crucial aspect of investing. Return on investment (ROI) is a ratio between net profit (over a period) and cost of investment (resulting from an investment of some resources at a point in time). Return from equity comprises dividend and capital appreciation. Internal Rate of Return (IRR) The Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of a project zero. Dealing with the return to be achieved requires estimate of the return on investment over the … A buyer may be greedy for the possibility of high returns and purchase the bond or decline by deciding the potential payoff isn’t worth the possibility of losing some, if not all, of the original invested amount. A buyer may feel safe and therefore purchase the debt, or not if they decide that the low return isn’t worth having their money tied up with the issuer for years. This doesn’t influence our evaluations or reviews. It is confined to five years data of ICICI and HDFC securities. + read full definition in shares. An investor may bear a risk of loss of some or all of their capital invested. By contrast, if the bond issuer has a questionable reliability record, it will take promise of a larger return (a "junk bond") to entice investors. The Risk-Return Tradeoff The correlation between the hazards one runs in investing and the performance of investments is known as the risk-return tradeoff. Although there are many investment products in the market, it is the asset allocation rather than the actual investment products which differentiates high returns from low returns and will enable you to reduce the risks involved with investing. An investment that presents high risk needs to offer high potential return to entice investors. Andrew Burton/Getty Images News/Getty Images, Business Dictionary: Return on Investment, Securities and Exchange Commission: Short Sales. Investments in the stock market. 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