Which of the following best describes the risk-return tradeoff in financial markets?

A. Investors are always compensated with higher returns regardless of the risk level.
B. Lower risk assets always outperform higher risk assets in the long run.
C. Assets with higher risk (greater volatility) tend to offer higher expected returns as compensation to investors.
D. Risk and return are independent; investors choose based only on preferences.
E. Government bonds have historically delivered the highest returns due to zero risk.

✅ Correct: C. The fundamental principle of the risk-return tradeoff is that investors demand higher expected returns to bear higher risk. Historical data confirm that more volatile asset classes (like small stocks) have yielded higher average returns.