Put simply this concept tests the fundamental reasoning behind each individuals investments - Do you know what your personal risk tolerance is? Or the degree to which you will accept a certain level of risk for a given level of return.
The risk-reward concept states that while your investment decision can reap fantastic profits, you must be willing to accept a loss if it doesn't. This is the fundamental reasoning behind ensuring you know you own personal risk tolerance - the degree to which you will accept a certain level of risk. When choosing investments to spend your money on, the risk tolerance is critical to guaranteeing that you don't enter investments that are beyond your range of financial comfort.
Realizing that some risk must be adopted in order to receive a return is underlying to the investment process, but equally managing this risk to your tolerance range is more important. Not being able to sleep at night worrying about your investments is clearly an adoption of too much risk - equally knowing that your money could be working harder and faster for you to get a higher return, is an adoption of too little. The appropriate balance between these two extremities is the ultimate goal you wish to achieve to establish how much risk is right for you.
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