Not all investors have to take risks when investing. Some investments are "risk-free".
For every investment there is a range of potential returns. The investment can be summarised by:
- the expected return: the probability-weighted average of the potential returns; and
- the risk: the variability of the potential returns.
In any liquid market, i.e. an investment market with a sufficiently large volume of investors, the expected return and the risk will be related. Higher expected returns and higher risks go together.
Why is this the case? Simply because investors will assess investments. If this risk of the investment is high then they will be willing to pay less for it, so the price will be driven downwards. With a lower price the expected return is higher. In a liquid market with plenty of investment options, investors will choose investments with a higher return for equivalent risk or a lower risk for an equivalent return. As such, the risk and return become clearly related.
Risk and return can be plotted on a chart. On the right hand side of the chart will be projects with high risk and high return. On the left hand side will be projects with low risk and low return.
On the left hand axis are investments with no (or very little) risk. Such investments are termed "risk-free". A typical example of a very low risk investment is a government backed bond (where the government also controls the printing of the currency - so can bail themselves out).
"Risk-free" investments offer security but typically low returns. As the returns may not keep up with inflation their real return may be negative. Whether such investments are truly risk-free thus depends on the perspectives and liabilities of the investor. Investors looking to receive higher returns are generally happy to accept some degree of risk. This explains why most investors take risks when investing - for the associated higher returns.
Not investment advice - please do your own research.