What is the risk/return ratio?
Understanding the risk/return ratio is essential in defining a stock market investment strategy that reflects your situation and investment goals. Read on for all the details.
The risk and return on a given investment are linked
Like any investment, stock market investments carry risk. However, they also offer the potential for attractive returns on your capital.
An investment’s risk and anticipated return are closely linked:
- if you expect to achieve high returns, you’ll need to select products that offer higher levels of risk;
- onversely, if you want to minimise risk, opt for investments that offer potentially lower returns.
Good to know
When you’re an investment client at BGL BNP Paribas, you receive a Suitability Statement on every investment. We provide you with this document before executing the buy order so that you can see your portfolio’s current level of risk, as well as the future risk level if the investment is carried out, based on your investor profile.
Risk and return also relate to your investment horizon
An investment’s risk and return also depend on the investment horizon. In other words, they depend on how long you plan to hold onto your investment.
Generally, if your investment horizon is short, you’ll need to opt for less risky investments with low volatility. They will therefore offer fewer performance prospects.
On the other hand, if your investment horizon is long, you can opt for riskier and more volatile investments, which offer high performance potential. While the short-term volatility of these investments will be higher, performance potential over the long term will be greater. The impact of market fluctuations will smooth out over time.
An indicator to better visualise risk
An indicator has been developed to help you understand a fund’s risk level: the SRI, or “Summary Risk Indicator”.
It lets you compare different financial products available on the market using a single risk and volatility scale. This scale ranges from 1 for the safest investments to 7 for the riskiest investments.
Good to know
To illustrate, funds invested in bonds are often rated between 2 and 4, funds invested in equities between 4 and 7 and diversified funds between 2 and 6, depending on their exposure to different markets.
Expert advice on your financial investments
With our team of experts, we can help you take your first steps into the world of investing. Our specialists will answer all your questions about financial products, with no minimum investment.
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Frequently asked questions
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What is investment volatility?The volatility of an investment means its capacity to increase or decrease over a given period of time. The greater the volatility, the more likely it is that the value of the investment will vary widely.
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What is investment risk?
An investment’s risk encompasses all forms of uncertainty regarding how it will perform over time: risk of capital loss, default risk on some assets, risk of variations on the markets in which it is invested, etc.
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What is the investment horizon?
The investment horizon is the period over which an investment should be held. This is the timeframe deemed appropriate to mitigate the volatility of an investment and obtain an expected return.
The information shown on this webpage does not constitute a recommendation or investment advice. This webpage does not claim to provide an exhaustive description of the investment services to which it refers, nor of certain associated risks.
A decision to invest may not be taken solely on the basis of this document and should only be taken after careful analysis of all its characteristics and associated risks (as described in the “Investor Guide”) after having obtained all the necessary information. If you feel it necessary, BGL BNP Paribas would encourage you to contact professional advisors, including tax advisors.
BGL BNP Paribas S.A, with its registered office at J.F. Kennedy, 50, L-2951 Luxembourg, as a credit institution, is subject to regulation and supervision by the Commission de Surveillance du Secteur Financier (CSSF), 283 route d’Arlon, L-1150 Luxembourg.