The average expected rate of return of a ﬁnancial asset equals
A) the rate that compensates for time preference plus the rate that compensates for risk.
B) the rate that compensates for time preference plus the rate of inﬂation.
C) beta plus the rate that compensates for risk.
D) the risk-free interest rate plus the rate of inﬂation.

Question

Quizplus · Accepted Answer

The average expected rate of return of a financial asset should compensate for both time preference (the preference for consumption today rather than in the future) and risk. Therefore, option A, which includes both factors, is the best choice.

The Average Expected Rate of Return of a ﬁNancial Asset