1. Please explain the risk vs. expected rate of return tradeoff, the security market line, and determination of beta on this basis. Include explanation of all the constituents namely, security market...

1. Risk Vs Expected Rate of return
Risk relates to the level of volatility and/or possible monetary loss involved in an investment decision. There is a favorable correlation among the amount of risk anticipated and the amount of return predicted. The larger the risk, the higher the expected return and the greater the possibility of significant loss. Investments that contain low risk, such as high-grade bonds, will deliver a lower estimated rate of profit than those that carry high risk, such as the new company's shares. A sensible shareholder would have some degree of risk tolerance, and would only consider the uncertainty if he was appropriately prepared for it (CFI, 2020)
The Security Market Line (SML) is a graphic depiction of the Capital Asset Pricing Model which offers the estimated return of the stock at various levels of structural or market risk. It is also considered the 'distinctive line' where the x-axis reflects beta or investment risk, and the y-axis describes the predicted profit (LumenLearning, 2020)
Risk free rate: The risk-free rate of return is the conceptual rate of return of investing at zero risk (YCharts, 2020)
Beta: Beta is a numerical value that calculates volatility in the share price as a result of shifts in the share market index. Interpretation: Beta tests the response of the stock price to shifts in the total share market. Uncertainty of the stock and structural risk can be calculated by beta measurement.
Market Risk Premium: The risk premium is the price of return on assets over and above the risk-free or fixed rate of return. Difference of Expected share return and Risk-free rate (Statista, 2020)
Example:
2. The weighted average capital cost (WACC) is a measure of the capital expenditure of a company where each type of capital is percentage wise allocated. Both forms of assets, comprising shareholder stock, preferred shares, bonds and all other long-term liabilities, are considered in the WACC measure (TheStrategicCfo, 2020)
Significance: The weighted average capital cost (WACC) is a significant monetary principle that is commonly used in monetary markets to measure whether the profit on assets will fulfil or exceed the capital investment expense of an investment, project or business (equity + debt)
3. Expected rate of return:...