The process of two-way switching between risky and risk-free investments depending on or in reaction to risk sentiment as perceived in the market. Investors usually swing between risky/ riskier assets such as high-yielding bonds and cyclical stocks and and risk-free or low-risk assets such as government bonds. When risk is perceived to be high, less risky assets would be sought, while at times of high risk, riskier assets would be more desired.
The risk involved here is that type of risk that doesn’t contribute to the return on invested funds- i.e., that risk whose taking would only expose investors to higher levels of risk at the same level of return (given the perceived overall risk in the market).
It is known for short as RoRo.
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