Section I: IntroductionThe risk-return tradeoff is a fundamental concept in finance. The basic principle is that rational investors expect higher rates of return for riskier investments; as such, stock returns should be a negative function of stock volatility. Two hypotheses: “leverage” and volatility feedback have been put forward in support of this view. The notion behind leverage is that a decrease in stock returns increases a company's leverage, leading to greater stock volatility. In contrast, volatility feedback reverses causality and posits that a persistent increase in volatility incentivizes investors to increase their expected returns. This causes the stock price to fall immediately to allow for higher future returns. The intuition here is that increased risks cause investors to increase their expected returns, which leads to higher discount rates and thus lower firm values. This theory is consistent with the capital asset pricing model (CAPM) of Treynor, Sharpe, and Lintner and other multifactor models. In contrast, real options theory suggests that the value of a firm's real options should increase as the volatility of its underlying process increases (McDonald and Siegel (1986)). The reason for this is well established: an increase in output price volatility widens the gap in future profits and thus increases the maximum possible value for a firm. Conversely, the option's potential downside is limited to its initial investment value. Additionally, businesses with high levels of operating and investment flexibility are able to take advantage of periods of economic prosperity by restarting or expanding operations, while mitigating poor economic conditions by reducing or ceasing temporarily their activities. .....the leaves maintain investment levels. In other words, companies with the ability to raise funds internally are still able to exercise their investment opportunities. To account for this, we screen companies with negative cash flow growth and divide them into cash holding terciles. We then divide firms in the bottom tercile of cash holdings into debt quintiles and run separate regressions for each of the quintiles according to equation (2). If our hypothesis is verified, we would expect to observe a monotonic decrease in the sensitivity of return to volatility as leverage increases. Following O'Connor Keefe and Tate (2013) and Duffee (1995), we define cash flow growth as the contemporaneous growth in operating liquidity. flow of a business; cash holdings as the ratio of cash and equivalents to total net cash assets; and leverage as the ratio between the book value of debt and the market value of equity..