Explain the risk–return relationship, Financial Management

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Explain the risk–return relationship

The relationship among the risk and required rate of return is termed as the risk–return relationship. It is a positive relationship since the more risk assumed, the higher the needed rate of return most people will demand.

Risk aversion describes the positive risk–return relationship. It describes why risky junk bonds carry a higher market interest rate as compared to essentially risk-free U.S. Treasury bonds.

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