Asked Feb 22, 2020

what is risk and return in the context of financial decision making?


Expert Answer

Step 1

Risk and return are two very important concept used in any financial decision making. Two financial managers may have different opinion when considering a specific investment or project, based on their risk-return trade offs.

The relationship between risk and return can be analyzed as follows:

Finance homework question answer, step 1, image 1

Step 2

Risk premium is the “reward” expected from the investors, usually to compensate the extra risk taken for investing in that particular asset. Risk premium also considers, maturity risk, inflation risk, default risk and liquity risk as factors.  Investors are generally considered to be risk averse, therefore, they expect an average return based on the ...

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