For any given ﬁnancial asset, risk levels and average expected rates of return are
A) independent of each other.
B) negatively related because assets with higher average expected rates of return sell for higher prices, which are inversely related to risk.
C) positively related because both are inversely related to the rate of inﬂation.
D) positively related because investors must be compensated for taking greater risks.

Question

Quizplus · Accepted Answer

According to modern portfolio theory, risk and expected return are positively related because investors require higher compensation for taking on greater risk. Therefore, assets with higher expected returns tend to have higher levels of risk.

For Any Given ﬁNancial Asset, Risk Levels and Average Expected