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

Which statement best describes the relationship between risk and expected return across asset classes in the investment landscape?

Higher-risk assets generally need to offer higher expected returns to attract investors, as compensation for uncertainty. This is an expectation only, not a guarantee, since actual returns of risky assets may turn out lower or even negative.

  1. AAssets with higher risk generally need to offer higher expected returns to attract investorsCorrect
  2. BHigher risk assets guarantee higher actual returns over any period
  3. CRisk and return are unrelated for diversified investors
  4. DLower risk assets always give higher returns than equity

Explanation

Investors demand compensation for bearing more risk, so higher-risk assets carry higher expected returns. This is expectation, not a guarantee; actual returns can be lower or negative in any period.

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