For most ﬁnancial assets, investors must be compensated for

Question

Quizplus · Accepted Answer

Financial assets typically involve nondiversifiable risk (systematic or market risk) that cannot be eliminated through diversification and time preference (the preference for current consumption over future consumption) which must be compensated for. Diversifiable risk (also known as unsystematic or company-specific risk) can be eliminated through diversification and does not need to be compensated for. Therefore, option C is the best choice as it correctly identifies the two factors that investors must be compensated for.

For Most ﬁNancial Assets, Investors Must Be Compensated for