The relationship between risk and return is a fundamental concept in finance. It describes the idea that higher potential returns are generally associated with higher risks. This connection is based on the following principles:

1. Risk and Return in Theory

Investors expect a reward for taking on risks. The higher the risk, the higher the potential return should be to compensate the investor for the uncertainties involved.

2. Low Risk = Low Return

Low-risk investments, such as government bonds or savings accounts, typically offer stable but low returns. This is because the risk of loss is minimal, and the investment is considered safe.

3. High Risk = Potentially High Return

High-risk investments, such as stocks, crowdlending, or cryptocurrencies, have a greater potential for loss. However, they can generate above-average profits if the investment is successful.

4. Diversification to Minimize Risk

Diversification is a key strategy. By spreading investments across different asset classes or projects, risk can be reduced without significantly diminishing potential returns.

5. Relationship in Crowdlending (e.g., Cashare)

On crowdlending platforms like Cashare, this relationship is particularly evident:

• Lower Risk Categories (e.g., A or B): Lower returns because the borrower's default risk is minimal.
• Higher Risk Categories (e.g., C): Higher potential returns but increased risk of borrower default.

Summary

Investors must consider their individual risk-return profile to make decisions that align with their financial goals and risk tolerance. A balanced strategy can help achieve a proper equilibrium between risk and return.