Explain the concept of the risk–return relationship.

Question

Explain the concept of the risk–return relationship.

Answer 1

The relationship between required return rate and risk is identified as the risk–return relationship. This is a kind of positive relationship since the additional risk involved; most people will demand higher the required return rate.
Risk aversion describes the positive risk–return relationship. It also defines why risky junk bonds have a higher market interest rate than the risk-free U.S. Treasury bonds.