Describe the sources of risk in the risk-return trade off

What will be an ideal response?

Answer: The interest rate risk is the risk of fluctuations in security prices due to changes in the market interest rate. Inflation risk reflects the likelihood that rising prices will eat away the purchasing power of your money, and that changes in the anticipated level of inflation will result in interest rate changes, which will in turn cause security price fluctuations. The business risk deals with fluctuations in investment value that are caused by good or bad management decisions, or how well or poorly the firm's products are doing in the marketplace.
Financial risk is associated with the use of debt by the firm. How a firm raises and uses its money affects its level of risk. Liquidity risk deals with the inability to liquidate, or convert into cash, quickly a security at a fair market price. Market risk is risk associated with the overall market movements - upward and downward. Political and regulatory risk comes from laws imposed by state and national governments that affect investment values. The exchange rate risk refers to the variability in earnings resulting from changes in exchange rates among countries. Call risk is the risk to bondholders that a bond may be called away from them before maturity, resulting in a loss of income or market value. All of these types of risk make up the risk found in the risk-return trade off.