Risk and Rates of Return: Introduction Risk is an important concept affecting se

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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.

Explanation / Answer

options have been answered based on the numbering

1. higher

2. averse

3. higher

4. risk premium

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