Explain the statement 'Higher the return the higher will be the risk'.

Higher return should be expected by those who are willing to bear higher risk. If any investor is not willing to go for higher risk, he should invest in risk-free securities like government securities and should not expect higher returns. There are two parts of return from investment - risk free return and risk premium. It is the premium that enhances the return from investment. Risk premium is the function of risk. It changes in the direct proportion to risk. Total risk is the summation of systematic risk and unsystematic risk. As per Capital Asset Pricing Model (CAPM), unsystematic risk can be diversified away but systematic risk, on the other hand cannot be diversified away without cost. In other words, investors need to be compensated by a certain risk premium for bearing systematic risk. As per CAPM, E(R i ) = R f + [E(R m ) - R f ] β i Where E(R i ) is expected return R f is risk free rate E(R m ) is Expected return on market portfolio β i is systematic risk coefficient Expected Return E(R i ) = Risk-free rate of return (R f ) + Risk premium specific to asset i In this way, if an investor is expecting higher return, he must be ready to take higher risk.