The relationship between risk and rate of return is the most important concept for any investor, which states that the return is directly proportional to the risk. In other words, the relationship between risk and rate of return explains that the higher the risk, the higher the profit, and the lower the risk, the lower the return. If market risk is measured by volatility, that is, the degree of price fluctuations, then the most volatile asset will be the most profitable. It becomes clear that return and risk are closely and directly related. Around the principle of rate of return and risk can be built a lot of examples, and describe in different ways in practice this basis of investment activity.
There is a formula to decide the relationship between risk and rate of return:
kj= kRF+ (kM–kRF)Bj,
where kj is the required rate of return on stock j; kRF is the risk-free rate of return; kM is the required rate of return on the market portfolio and Bj is the beta coefficient of stock j
However, this does not mean that by taking on the increased risk, you will get a high return. In fact, high risk does not guarantee a high return. Practice shows that even low-income assets can carry more risk than high-income ones. For an active investor, the degree of risk depends more on his competence, temperament and thoroughness of analysis. If the analysis of the company was not carried out carefully enough, the risk of making a mistake increases. An impatient and emotional investor also risks more than, he is prone to panic and emotions that can cause him to sell his securities at an unfavorable time. However, in most cases, risk and rate of return are closely related. Some factors need to be considered when calculating the relationship between risk and rate of return. First, there is such a thing as risk-free rate or profit, which describes the profitability, which in a particular economy can be obtained without risk. The risk-free rate is the smallest possible predictable rate of return. But precisely because it is predictable, is low. For example, in the US the risk — free income ranges around 6%.
Diversification of investments is a complex of various measures that cut the risk of the entire investment concept. The more funds are invested in a variety of industries, the less risk of losses. The most effective is considered to be the redistribution of invested funds, where the investment portfolio is added to the assets of various industries, classes and accessories. The use of diversification of investments will make it possible to compensate for losses in one industry by increasing revenues in another. The main task of diversification of the investment portfolio is the distribution of financial flows to different types of investments.
Most of the risks can be present both in traditional financial schemes and in crowdfunding. Therefore, it is important to note that crowdfunding is not the most risky activity, since crowdfunding platforms often provide financial security for the investor and transparency of the transaction.
During the pandemic, crowdfunding is becoming more popular and allows many entrepreneurs to develop their business. In the USA, there is a positive trend in the number of transactions and investments.