 (1).png)
Understanding the Relationship Between Risk and Return
When you think about investing — especially in the stock market — one of the first things you need to understand is the risk and return relationship. This fundamental principle governs how you should choose your investments, allocate your money, and manage your portfolio over time. Whether you're considering stocks listed on the Pakistan Stock Exchange (PSX), mutual funds, or real estate, the idea remains the same: higher returns usually come with higher risk.
In this chapter, we’ll explore what risk and return mean in investing, how they relate to each other, what kinds of risks exist in the stock market, and how to manage these risks to achieve your financial goals.
Risk in investing refers to the possibility of losing money or not achieving the expected return on an investment. Every investment — whether it’s stocks, bonds, commodities, or real estate — carries some level of uncertainty. However, the level of risk varies depending on the nature of the asset.
In the stock market, risk could mean:
Return is the reward you earn from your investment. It can come in two forms:
Returns can be positive or negative, depending on how the investment performs.
The risk-return tradeoff is a basic investing principle:
To achieve higher returns, an investor must be willing to accept more risk.
If you choose a low-risk investment, such as a fixed deposit or government bond, the return is generally modest. On the other hand, investing in stocks or real estate may offer higher returns — but comes with the possibility of short-term losses.
For example:
The Pakistan Stock Exchange has historically delivered strong returns over the long term, but it is also subject to volatility. Political instability, inflation, rupee devaluation, and interest rate changes all affect investor sentiment and stock prices.
For instance:
Different sectors carry different levels of risk. For example:
Diversification across sectors helps reduce the overall risk in your portfolio.
Investors use several tools to assess and manage risk:
Investing isn’t just about chasing high returns. It’s about aligning your risk appetite with your financial goals.
Ask yourself:
Though this guide focuses on stocks, here’s a brief comparison of how other asset classes behave in terms of risk and return:
Asset Class | Risk Level | Return Potential |
---|---|---|
Savings Account | Very Low | 10–12% p.a. |
Government Bonds | Low | 10–12% p.a. |
Mutual Funds | Medium | 12–18% p.a. |
Real Estate | Medium to High | 12–20% p.a. (long term) |
Stocks | High | 15–30% p.a. (long term) |
Ready to start your investment journey with Azee Securities? Open a Stock Trading Account and gain access to the Pakistan Stock Exchange (PSX). Let Azee Securities help you make informed decisions. Our expert advisors, advanced trading platform, and real-time market data ensure you stay ahead of the curve.
Azee Securities Private Limited
Member Pakistan Stock Exchange | PMEX | NCCPL | CDC
SECP Registered & Regulated