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Fund Spy

Risk and Return Revisited

They're correlated, but not in the way many investors think.

To generate better returns, investors should take on more risk, right? The answer may seem obvious, but historically, it's depended on what the meaning of the word "risk" is.

In an absolute sense, it's of course true that the more money investors put at risk, the more they'll gain if their investments increase in value. However, with the kind of risk that's become synonymous with volatility in investment argot, the opposite has been true. On average, high-beta investments--those whose prices have swung wider than an index over a given period of time--have historically generated worse returns than less-volatile alternatives.