Risk and Retum 185 lM. Combined risks Total risk ‘The combination of systematic risk and unsysmatic risk: Gome systematicy alsoreferredtoasstand-slonerisk because this isthe isk risk and some an investor takes if he oF she purchases only one invest= lunsystematic risk) ‘ment which is tantamount to “putting all your eggs into one basket. Corporate risk The riskiness ofthe frm without considering the effect to stockholder diversification; based on the combination of assets held by the firm (inventory, accounts receivable, Plant and equipment, and so forth) Some diversification ‘xsts because the firm's assets represent a portfolio of investments in real assets.) RISK-RETURN TRADE-OFF The concept of required-rate-of return can be examined from a single individual investor's point of view and then be extended to explain how an investor required rate of return relates to the rates prevailing in the market. Individual Investor's Required Rate of Return Whenan investment is to be made, the investor always has alternative opportunities to invest funds. If not, there is no decision to be made. In other words, a prospective investor's examining opportunity with the intention of achieving a required rate of return. Itis the rate foregone on the next best alternative investment opportunity. In general, this rate is a function of (1) the time value of money, (2) the riskiness of the investment, and the investor's attitude toward risk. The greater the risk, the greater the compensation required. Figure-10 illustrates the risk-return trade off. FIGURE-10 RISK-RETURN TRADE-OFF