Risk–return spectrum

The risk-free rate has zero risk (most modern major governments will inflate and monetise their debts rather than default upon them), but the return is positive because there is still both the time-preference and inflation premium components of minimum expected rates of return that must be met or exceeded if the funding is to be forthcoming from providers.

The range width is larger, and follows the influence of increasing risk premium required as the maturity of that debt grows longer.

Following the lowest-risk investments are short-dated bills of exchange from major blue-chip corporations with the highest credit ratings.

Small-cap stocks are generally riskier than large-cap; companies that primarily service governments, or provide basic consumer goods such as food or utilities, tend to be less volatile than those in other industries.

Option and futures contracts often provide leverage on underlying stocks, bonds or commodities; this increases the returns but also the risks.

Note that in some cases, derivatives can be used to hedge, decreasing the overall risk of the portfolio due to negative correlation with other investments.

Having no earnings and paying no coupons, rents or dividends, but instead representing stake in an entirely new monetary system of questionable potential, cryptocurrencies are generally considered to be very high-risk investments.

These range from Bitcoin and Ethereum to projects of murky origin and utility which in the riskiest cases are scarcely differentiable from an unregistered security or Ponzi scheme.

For example, the more risky the investment the more time and effort is usually required to obtain information about it and monitor its progress.

[citation needed] That part of total returns which sets this appropriate level is called the risk premium.

If every mid-range return falls below the spectrum line, this means that the lowest-risk investment has the highest Sharpe Ratio and so dominates over all others.

The withdrawal and redirection of capital ceases when all returns are at the levels appropriate for the degrees of risk and commensurate with the opportunity cost arising from competition with the other investment types on the spectrum, which means they all tend to end up having the same Sharpe Ratio.