Question

When looking at securities in accounting why do they say the more risk you take the higher return you can earn ?

Answer 1

Answer

* This generally applies to the kind of securities in which the funds are invested.
* Funds can be invested in various kind of securities like Bonds, Common Stock, Preferred Stock, etc.
* Different type of securities provide different rates of return on them, some higher than other.
* Some securities are not risky, like investment in Bonds.
When funds are invested in Bonds, the investor receives guarateed return periodicly in form of Interest.
However, interest rates on securities like Bonds are lower, because the risk involved is lower.

* Preferred stock investment is somewhat risky as it depends on the company's profitability. The rate of dividend is generally higher.
* Common Stock investment is the riskier investment because the receipt of dividend is NOT SURE. Company might not declare and distribute dividend if there has been a loss. However, these investment provide massive rate of return which can go up to 30%-40%.
However, the risk involved in also higher.

* In short it can be summed up as:
The greater the risk involved, the higher will be the return,
Lower the risk involved, lower will be the return.
(Return = Rate of Return)