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

Which statement about the relationship between risk and return in the investment landscape is most accurate?

Higher expected return generally comes with higher risk, because investors demand a risk premium for bearing uncertainty. Safer instruments such as government securities usually offer lower returns, while equities are more volatile. Diversification reduces specific risk but does not eliminate the underlying trade-off between risk and expected return.

  1. AHigher expected return is generally associated with higher risk, as investors demand a premium for bearing uncertaintyCorrect
  2. BGovernment-guaranteed instruments always provide the highest returns
  3. CEquity investments carry lower risk than bank deposits over every holding period
  4. DRisk and return are unrelated once an investor diversifies

Explanation

The basic principle is that investors require compensation, a risk premium, for taking more risk. Low-risk instruments generally offer lower returns, equity is volatile in the short run, and diversification reduces but does not remove the link between risk and expected return.

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