What does a risk-return graph show regarding various funds like cash, bond, balanced, managed, and equity funds?

A risk-return graph illustrates the fundamental relationship between the potential return of an investment and the level of risk associated with it. In essence, it conveys that as the expected return on an investment increases, the level of risk also tends to increase. This principle is a cornerstone of investment theory, indicating that more aggressive investments, such as equity funds, are generally associated with higher volatility and greater potential for returns compared to more conservative investments, like cash or bonds.

The positioning of various types of funds on this graph helps investors understand this relationship. For instance, cash funds typically have a very low return and, consequently, low risk, while equity funds potentially offer higher returns but come with a higher likelihood of loss. This dynamic helps investors determine where they want to place their investments based on their risk tolerance and return expectations. Thus, the assertion that higher return comes with higher risk is a critical concept for all investors and is correctly represented in the risk-return graph.