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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Investment Landscape

Which of the following best describes the relationship between risk and expected return across asset classes?

Higher expected return is generally associated with higher risk. Investors require extra compensation for accepting greater uncertainty, so riskier assets like equity are expected to reward more than safer ones over long periods, although this is not guaranteed in any particular period.

  1. AHigher expected return is generally associated with higher riskCorrect
  2. BLower risk assets always give higher returns
  3. CRisk and return are unrelated
  4. DEquity always gives lower return than debt

Explanation

Investors demand compensation for bearing extra risk, so assets with greater uncertainty such as equity usually offer higher expected returns than safer ones. This is an expectation, not a guarantee, so 'always' statements are wrong.

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