Risk/Reward model – all investment factors drive this universal model.

The concept of investment is summarized into “Risk/Reward” model of wealth creation. It is commonly accepted that a higher risk tolerance correlates with higher potential of reward.
Following diagram illustrates the map of possible opportunities in relation to their Risk/Return ratio.

It must be noted that the quality of an investment opportunity is not determined only by its level of return, but also by the certainly of its risk level. In other words not every low return investment is a bad investment and vise versa.
In the simplest form the risk/reward values are relatively know and predictable.

The two extreme investment options would be:
Secured loan and Lotto

In case of secured loan, investor will have practically minimum risk/reward, while the latter investment has an extreme high potential of risk and reward. In the venture and corporate investments the number of contributing attributes and complexity of risk assessment and potential return are much higher. There are factors involved such as market needs, feasibility of solution, management’s ability to execute and barriers to entry.

In absence of a crystal ball, a careful examination and applying analytical techniques would offer the most powerful tool to gain insight required for the decision-making.