Which statement accurately reflects what a higher risk investment should ideally yield?

A higher risk investment is expected to yield increased expected returns to account for the additional risk. This principle is rooted in the risk-return tradeoff, which asserts that investors typically require a higher return as compensation for taking on greater risk.

In financial markets, investments that carry higher risk—such as stocks or speculative assets—have the potential for significant fluctuations in value. To entice investors to accept this uncertainty, these investments generally offer the prospect of higher returns compared to lower-risk options, such as government bonds or savings accounts, which provide more stability but usually yield lower returns.

This relationship is essential for investors to consider when constructing a diversified portfolio, as they balance the desire for growth (potentially achieved through higher-risk investments) with the need for capital preservation (often achieved through lower-risk assets).