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Risk Reward Relationship

Risk Reward Relationship
Investment risk and potential reward often go hand-in-hand. Generally speaking, the greater the risk, the greater the reward potential. The lower the risk, the lower your return is likely to be.
Asset classes performance
Investment risk is often associated with high volatility. If the price of your investment fluctuates a lot, and you need to sell or redeem it when its price is down, you could lose some of your capital.
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Different types of investments - such as stocks, bonds, and money market funds - carry different risk/potential return ratios. Different instruments within each category also vary in their riskiness and potential for return.
*Source: Micropal, AIM. The returns shown in the chart represent the performance of unmanaged indices and assume reinvestment of dividends and interest payments. The performance figures do not reflect the impact of any expenses, such as commissions or sales charges, that would have been associated with actual investments and would reduce returns. Indices used: S&P 500 (Stocks), Lehman Brothers Intermediate Government/Corporate Bonds Index (Bonds), Federal Reserve 91-Day Treasury Bill data (Cash).
Stocks generally have greater return potential than bonds, but the risk is higher. Short-term bonds generally have lower risk than long-term bonds, but they usually have lower yields as well.
Short-term investments whose safety is guaranteed by the government, like Treasury Bills, are considered to have little or no risk. Unfortunately, they usually have a lower rate of return than other investments. You also run the risk of locking yourself into lower-yielding investments just before interest rates rise.
A very conservative investor, looking for safety, might have invested entirely in U.S. treasury bills, while a more aggressive investor, looking for high returns, might have invested entirely in stocks.
The low-risk strategy of the conservative investor would have produced a much lower return in the long term.
Over a 15-year period, the aggressive investor would have done much better, but would have faced large market swings, such as the market decline in 1987.
Despite the substantially greater risk, an aggressive investor who was able to hold on to this investment over the long term could have more than recouped the 1987 losses.
Of course, past performance is no guarantee for future results.
Many different types of funds are available to meet your needs :
Because the choice of mutual funds mirrors the financial market place, you can find virtually any kind of investment. Here are brief descriptions of the major fund categories.
Stock Funds
Stock Funds invest in the stocks of various types of companies. Traditionally, stocks have kept pace with the economy and represent your best protection against inflation. Some stock funds, such as growth, aggressive growth and value funds are based on a specific investment strategy. Others, such as small cap, mid cap, large cap and blue chip, choose securities determined by the size or financial status of the selected companies. Index funds are funds that attempt to replicate the composition of industry benchmarks, such as the S&P 500.
Bond Funds
Bond Funds seek to deliver steady income from a portfolio of bonds. Because of the added risk from price fluctuation inherent in longer-term bonds, yields vary based on the term of the bonds in the fund's portfolio. Short-term bond funds are considered safer, but tend to pay lower yields than riskier long-term bond funds. Intermediate bond funds offer higher returns than short-term bond funds with less risk than longer-term bond funds.
Hybrid Funds
Hybrid Funds combine different types of securities in one fund to meet varying objectives. For instance, a growth and income fund might invest in both stocks and bonds.
Asset Allocation Funds
Asset Allocation Funds combine securities from different asset classes in varying proportions to help manage different levels of risk and return. An example of this type is CitiSelect Portfolios, a family of mutual funds available exclusively through Citibank. Each portfolio invests in a different mix of stocks, bonds and cash in seeking different investment objectives.
International and Global Funds
These funds invest in securities issued in other countries. International funds invest only in foreign securities, while global funds invest in both foreign and U.S. securities. Many other mutual funds of all types may invest a certain percentage of their portfolio in international investments. Investors should see the risk factors section in the fund's prospectus for details regarding international investing.
Money Market Funds
Unlike all other types of mutual funds whose share prices fluctuate, money market funds attempt to maintain a stable share price of $1. To try to accomplish this, they invest in very short-term securities and commercial paper, which have less price fluctuation. Money market funds are intended as a parking place for money between investments and a place to maintain cash reserves. Over the long term, they do not keep pace with inflation. Different types of money market funds invest in taxable, tax exempt and U.S. Government securities. While money market mutual fund managers strive to maintain a stable net-asset value, the funds are not federally insured and there is no guarantee that a stable net-asset value will be maintained.
For more complete information on mutual funds, including sales and distribution charges and other expenses, ask for a prospectus. Please read it carefully before you invest or send money.
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