The relationship between risk and return is fundamental in financial theory and is linked to investment decision-making.

The risk refers to the possibility that an investment's actual return will differ from the expected return, involving the potential for both loss and gain. Return, on the other hand, is the gain or loss on an investment.

Typically, higher-risk investments are expected to offer higher returns to compensate investors for taking on more risk.

Safer investments with lower risk tend to offer lower returns, known as the risk-return tradeoff.

Consider Sarah. She decided to invest in a technology start-up, attracted by the high potential returns if the business succeeds. However, investments in startups also carry higher risk, as their success is uncertain.

Alternatively, Sarah could choose a government bond, which generally offers lower returns but significantly less risk.

Sarah's choice reflects her risk tolerance and investment goals. Sarah may choose safe government bonds with low returns if she prefers low-risk or may choose to invest in risky start-ups for high returns.

Balancing risk and return is crucial in building a portfolio that aligns with an investor's objectives and risk-taking capacity.