Risk vs. Return: Does Higher Risk = Higher Return?

It is a common misconception that higher risk equals higher returns. This is not always the case, as the risk/return trade-off graphic to the left illustrates.

More accurately, higher risk means the potential for higher returns.

For example, a high interest bank savings account might offer you a 1% rate. The risk, inflation aside, for this 1%? It’s next to nothing, as even if your bank went bankrupt, you are covered by CDIC insurance (up to $100,000). 

If you invest in the shares of a smaller, upstart technology company, it’s possible you could double your money in a year or two. Or, you could lose it all if the company folds.