As a rule of thumb in investing, the more risk you take the higher the return you should expect.

The benchmark for this is usually a medium dated government security issued by a stable country such as the UK or the US. Since the default risk is practically zero the yield available on these securities is sometimes called the “risk free rate”. Someone investing in equities on the other hand should expect normally to earn more than this risk free rate as they are taking more risk – shares are more volatile and firms are more likely to default than governments. The gap between the return you expect on a very safe security and the return you expect from something riskier is known as a risk premium.

READ MORE