Continued... O Risk vs.required return trade-off:Required return rf Risk premium rf risk-free rate o Real rate of return determined by supply and demand o Plus a premium for the effects of inflation Components of the risk premium Business risk -associated with the amount of operating leverage O Financial risk -associated with the use of financial leverage o Marketability risk -refers to the ability to quickly buy and sell O Interest rate risk -arising from changes in interest rates o Seniority risk -due to the priority of a security's claim on assets 渊外经价货多方是 超直O年N0l8药0000习Continued Continued… z Risk vs. required return trade-off : Required return = rf + Risk premium – rf = risk-free rate o Real rate of return determined by supply and demand o Plus a premium for the effects of inflation – Components of the risk premium o Business risk -associated with the amount of operating leverage o Financial risk -associated with the use of financial leverage o Marketability risk -refers to the ability to quickly buy and sell o Interest rate risk -arising from changes in interest rates o Seniority risk -due to the priority of a security’s claim on assets