There is a definite relationship between Risk and Reward in Markets. There are several factors that go into determining Risk but one of the biggest ones is leverage. This becomes quite clear when we look at Company valuations on the NSE.
So HDFC Bank has PE Ratio in the high 20's while Stocks like HUL, Nestlé, Pidilite etc are well past 80. So even though the quality of the Business may be equally good, the Market rate low or zero debt- read unleveraged- Companies as less risky and superior to highly leveled ones
The quality of Earnings without using leverage is always perceived to be superior to those which are magnified by leverage. Leverage equals Risk and this is discounted in Price
The same analogy can be used in Trading. Investors who are all cash get the most admiration and Warren Buffett's record of generating a CAGR of 22% over several decades is considered extraordinary. In Trading things are a bit different
Our current Margining System gives us a leverage of 7x while Trading F&O. That is high and to my mind very Risky for most Retail Traders. Before the Sebi rules came into effect, brokers were giving 5x on top of that making it 35x! A train wreck waiting to happen!
A lot of whining by those who used it and were lucky to survive it. But fortunately in any sane system, the level of acceptable Risk is decided by the lender and not the borrower. And in this case most borrowers do not even understand the level of Risk that they are taking.
The point of all this is that while it is great to talk about Returns, one must always look at Risk taken to generate it of which leverage is an important component. A person generating 60% who can go bankrupt in 1 bad month due to excessive leverage is not someone to emulate
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