Final answer:
Investors and creditors assess risk and return using expected rate of return, risk, and actual rate of return.
Step-by-step explanation:
Investors and creditors use several factors to assess risk and return:
- Expected rate of return: This refers to the average return an investment is expected to provide over a period of time. It helps investors and creditors evaluate the potential profitability of an investment.
- Risk: It measures the uncertainty of an investment's profitability. It includes factors like default risk (the risk of non-payment) and interest rate risk (the risk of sudden changes in market rates).
- Actual rate of return: This is the total rate of return, including capital gains and interest paid on an investment. It helps investors and creditors understand the actual performance of an investment.