Risk–return trade-off

Investors usually require a higher expected return for bearing additional relevant risk, but higher risk does not guarantee a higher realised return. The comparison must specify the risk measure, time horizon and available alternatives. Diversification can reduce some company-specific risk; in CAPM, the expected premium is linked to systematic risk rather than total volatility. Businesses also compare risk, return, liquidity and strategic consequences when selecting financing or investments. A high historical return alone does not establish that an investment is suitable or adequately compensates for risk.