Through a balancing process of the potential risk return trade-off, the portfolio objectives can be achieved. All investment strategies used to achieve the objectives must focus on these two important portfolio elements,
“Risk & Return.”
Risk means, the degree of volatility registered by an investment, how returns fluctuate over a given period of time, and the probability for loss of capital. It is accepted in the world of investments that the lowest form of risk is with assets held in very liquid instruments such as Government Treasury-Bills and fixed term deposits. From that level of risk all other investment classes are measured.
The asset class, which produces the best return over the long term risk adjusted, is Equities, followed by Bonds. Equities also contain the highest degree of risk (Volatility). However, the longer the investor’s duration/time horizon for Equities, the lower the volatility.