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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
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the return required to induce investors to purchase the asset. This relationship between risk and return indicates that investors are risk
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; investors dislike risk and require
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rates of return as an inducement to buy riskier securities. A
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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.
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