short answer
What are the trade-offs that investors consider when making investments? Explain what each of these aspects mean. Give one example of these trade-offs.
1. Risk vs. Return: Investors consider the level of risk associated with an investment and the potential return they could receive. Generally, higher returns are associated with higher risks. For example, an investor may choose to invest in a high-risk, high-return stock, knowing that there is a possibility of losing their investment.
2. Liquidity vs. Accessibility: Investors weigh the ease with which they can access their investment against the potential returns. Investments with higher liquidity, such as savings accounts or stocks, may offer lower returns compared to less liquid investments like real estate. For example, a person may choose to invest in a fixed deposit with a lower interest rate but immediate access to their funds, rather than real estate that may take longer to sell.
3. Diversification vs. Concentration: Investors balance the strategy of spreading their investments across different asset classes and securities (diversification) against focusing on a few key investments (concentration). Diversification helps reduce risk by spreading it out, while concentration offers the potential for higher returns. An example of this trade-off could be an investor choosing to have a mix of stocks, bonds, and real estate in their portfolio, rather than putting all their money into a single stock.