The trade-off between risk and return is also an important concept for companies trying to create value for their shareholders. It suggests that if a company is investing in riskier projects, it must offer its investors both bondholders and stockholders, (higher/lower) Blank 1 expected returns. For bonds, that means that higher-risk companies must pay (higher/lower) Blank 2 yields on their bonds to compensate bondholders for the additional default risk. Likewise, for stocks, riskier companies trying to increase their stock price must generate returns to compensate their stockholders for the additional risk. It is important to understand that the returns that companies have to pay their investors represent the companies costs of obtaining capital. Thus from a companys perspective, the risk-return line represents its cost of obtaining Blank 3, and the slope of the risk-return line reflects the average investors current Blank 4 to take on risk.

In general, no investment should be undertaken unless the expected Blank 5 is high enough to compensate for the perceived Blank 6.