What do investors expect when they take on higher risks in their investments?

When investors take on higher risks in their investments, they typically expect higher returns. This concept is rooted in the risk-return tradeoff, a foundational principle in finance that posits that potential return rises with an increase in risk. Investors are willing to accept the uncertainty and potential loss associated with riskier investments (such as stocks or speculative assets) because they anticipate that, in exchange for that risk, they will have the opportunity to earn higher profits compared to safer investments (like bonds or savings accounts).

For example, individuals investing in startup companies or high-volatility stocks are aware that these investments could lead to substantial gains but also significant losses. Thus, they are motivated by the prospect of achieving greater wealth over time, compensating for their acceptance of risks. This expectation of higher returns aligns with the fundamental belief that higher risk should lead to higher reward, incentivizing investors to diversify their portfolios in pursuit of maximizing their returns based on their risk tolerance.

In contrast, expectations for higher dividends, value preservation, or lower volatility do not directly address this relationship between risk and return. Higher dividends may be pursued in less risky investments, value preservation typically relates to safe asset classes, and lower volatility is associated with a preference for stability rather than aggressive growth, all of