In the risk-return profile of cash, bonds, balanced, managed, and equity funds, which statement is true?

The statement that higher return normally comes with higher risk is a fundamental concept in finance known as the risk-return tradeoff. This principle suggests that investments that offer the potential for higher returns are generally associated with a higher level of risk.

For example, equity funds, which invest in stocks, can provide substantial returns over the long term due to the inherent growth potential of companies. However, they also expose investors to market volatility and the possibility of losing money in the short term. On the other hand, cash or cash-equivalents, such as money market funds, are low risk and therefore provide lower returns. Bonds typically sit somewhere in between, offering moderate returns with moderate risk depending on their credit quality and duration.

Understanding this relationship helps investors make informed decisions about their portfolios, balancing their risk tolerance with their return expectations. This is why the correct statement reflects the general principle that higher returns are associated with higher risks, reinforcing the need for a well-considered investment strategy.