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 investment’s risk, the -Select-lowerhigherequivalentItem 1 the return required to induce investors to purchase the asset. This relationship between risk and return indicates that investors are risk -Select-ambivalentaverseItem 2 ; investors dislike risk and require -Select-lowerhigherequivalentItem 3 rates of return as an inducement to buy riskier securities. A -Select-risk premiumpar valuecorrelation coefficientItem 4 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 asset’s risk can be considered in two ways: On a stand-alone basis and in a portfolio context.