By Peggy Creveling, CFA, and Chad Creveling, CFA
You have to take more risk to get a higher return on your investment, or so the saying goes. The saying has its roots in the basic principles of modern portfolio theory and refers to the idea that investors should be willing to accept more short-term market volatility (risk) in order to receive a chance at a higher long-term investment return. Conversely, investors should accept lower long-term expected returns on their investments if they’re not willing to accept much volatility. How well does this theory work in practice? In what instances might taking on more risk not necessarily improve your chance at a greater return?