1. 1: Risk and Rates of Return: Introduction

Risk and Rates of Return: Introduction

Risk is an important concept affecting security prices and rates of return. Risk is the chance that some unfavorable event will occur, and there is a trade-off between risk and return. The higher an investments risk, the (-Select-lower higher equivalent) the return required to induce investors to purchase the asset. This relationship between risk and return indicates that investors are risk (-Select-ambivalent averse); investors dislike risk and require (-Select-lower higher equivalent) rates of return as an inducement to buy riskier securities. A (-Select-risk premium par value correlation coefficient) represents the additional compensation investors require for bearing risk; it is the difference between the expected rate of return on a given risky asset and that on a less risky asset. An assets risk can be considered in two ways: On a stand-alone basis and in a portfolio context.