The Risk - Return Relationship Smart Investing with Nosa

This episode discusses the relationship between risk and returns as it relates to investments. It begins by explaining two major components of returns - income (dividend / interest) and capital gains. It then moves on to talk about risk, differentiating systematic risk from unsystematic risk and how both affect returns.Finally, the episode shows a practical way to think about expected or required returns as compensation for different components of risk, explaining each component at length. The risk/return components discussed include:a). real risk-free rate (compensation for forgoing current consumption to a future single-period date)b). compensation for expected inflation ratec). maturity premium (compensation for extended duration and exposure to interest rate risk)d). liquidity period (compensation for potential loss of value due to illiquidity)e). credit spread (compensation for the possibility of default and the extent of loss in the event of a default)f). equity risk premium (compensation for taking up additional risk associated with equity securities vs fixed income securities)g). Others - (country risk premium, currency, tax, etc.)Thinking about risk and returns in this manner would make it easier to understand and evaluate the returns due to certain investment products and why certain investments may not be appropriate for you, despite having higher returns.