The rate of return on a risk free asset should equal the
A) Long run real growth rate of the economy.
B) Long run nominal growth rate of the economy.
C) Short run real growth rate of the economy.
D) Short run nominal growth rate of the economy.
E) Prime rate of interest.

Question

Quizplus · Accepted Answer

A risk-free asset is assumed to carry no risk and should provide a return that compensates for the time value of money. The long-run real growth rate of the economy, which is the growth rate adjusted for inflation, represents the return that can be achieved without taking any risk, as the risk-free asset carries no inflation risk. Therefore, the rate of return on a risk-free asset should equal the long-run real growth rate of the economy.

The Rate of Return on a Risk Free Asset Should