Risk-Return Relationship

The risk-return relationship is a fundamental concept in finance that states that the potential return rises with an increase in risk. Low levels of uncertainty (low risk) are associated with low potential returns, whereas high levels of uncertainty (high risk) are associated with high potential returns.

Example

Investing in government bonds is considered low risk with relatively low returns. On the other hand, investing in a startup company like Tesla in its early days was considered high risk, but it offered high potential returns.

Time Value of Money (TVM) Concepts

The time value of money is the idea that money available now is worth more than the same amount in the future due to its potential earning capacity. This principle underlies many financial concepts such as present value, future value, annuities, and perpetuities.

Example

If you invest $1,000 at an annual interest rate of 5%, it will grow to $1,050 in one year. Hence, $1,000 today is worth more than $1,050 a year from now.