Which statement is true regarding the relationship between risk and return?

The correct choice highlights a fundamental principle of investing, commonly referred to as the risk-return tradeoff. This principle asserts that investments that carry higher levels of risk are generally associated with the potential for higher returns.

Investors must understand that risk can manifest in various forms, such as market volatility, credit risk, or liquidity risk. When an investor opts for higher-risk investments—such as stocks or emerging market securities—they are essentially taking on the potential for more significant price fluctuations and possibly the loss of capital. In exchange for this increased risk, they are typically compensated with the opportunity for higher returns over the long term, as historically, those who have invested in riskier assets have achieved greater gains compared to those who have chosen safer, lower-return investments like government bonds.

This relationship is grounded in the concept of opportunity cost; by engaging in higher-risk investments, investors are positioning themselves to benefit from the possibility of substantial returns that could outweigh the drawbacks of the associated risks. Thus, the statement correctly encapsulates a key principle of investment strategy and behavior.