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Course Library · Lesson 2 of 6
Money · Guided lesson

Understand risk and return

About 28 minutes
Work at your own pace. Optional videos take extra time.
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Before you begin

The idea in everyday life

Investment risk includes price swings (volatility), permanent loss, rising prices reducing buying power (inflation), and difficulty getting your money out (liquidity). It also includes missing your goal. Compare these risks alongside fees, time available, and the job each investment does in your plan.

The idea

Risk capacity means how much loss your finances can handle. Risk tolerance means how much uncertainty you can live with. Your portfolio, or collection of investments, needs to fit both.

Try it

One step at a time.

Use the sample or information you have permission to use. Keep your work as you go. You can pause between steps.

  1. 1

    Learn the roles of cash, bonds, and stocks without assuming any asset is risk-free in every context.

  2. 2

    Estimate how a large temporary decline would affect your goal and your willingness to stay invested.

  3. 3

    Match shorter horizons with less exposure to assets that can fall sharply at the wrong time.

  4. 4

    Write what you will do during a market drop before one happens.

Example

See how it works.

A broad stock index fund may fluctuate sharply but spread company-specific risk across hundreds of holdings. A single speculative stock can fall for company-specific reasons. Cash is stable in dollars but may lose purchasing power. Maya assigns each option a role instead of calling one universally safe or risky.

Check your work

Did you cover these?

  • You can name at least three different risks, not only price movement.
  • Expected return is treated as uncertain, not quoted like interest on a bank account.
  • The risk level matches the goal’s time horizon and your ability to stay invested.
Your work

What to finish

A risk statement defining your horizon, acceptable decline, and no-panic rule.

Common mistake

Watch for this

Selecting a portfolio from a best-year return chart without considering the worst years.

How can I tell I understand it?

You can explain why the highest expected return is not automatically the best portfolio for a specific goal.

Try 3 questions

Quick knowledge check

Answer all 3 questions. Get at least 2 right and the lesson completes automatically.

Not yet passed

You’ll get an explanation for each answer. Signed in? Your results save to your account.

1A hypothetical $10,000 investment falls 20%, with no deposits or withdrawals. What value should you use when stress-testing the goal?
2After falling from $10,000 to $8,000, what percentage gain would restore the original value, with no cash movements?
3Money once intended for a goal ten years away is now needed in six months. Which response ignores the changed risk capacity?
0 of 3 answeredApply the lesson to a short question, then review the explanation.
2
Finish this lesson

Pass the check. We’ll save the progress.

Answer all 3 questions above and get at least 2 right. You can review the explanations and try again.

Go to the knowledge check
Optional course overview video · same video as Lesson 1
Fidelity InvestmentsWhat Is Diversification?YouTube
Optional course overview

What Is Diversification?

From Fidelity Investments. Watch here or open it on YouTube .

Pause when the video describes spreading exposure. Write down which risk diversification can reduce and which market-wide risk it cannot remove.
Tools, templates, and lesson sources

Tools and templates

Tools open in a new tab so you can keep your place here.

Sources and further reading

Explore the references behind this lesson.

SEC Investor.gov — Introduction to investing
FINRA — Investing basics
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