Under a consumption-based theory of the pricing of risky assets,uncertain returns on such an asset should be discounted by a "stochastic discount factor" that takes into account:

Question

Under a consumption-based theory of the pricing of risky assets,uncertain returns on such an asset should be discounted by a "stochastic discount factor" that takes into account:​

Quizplus · Accepted Answer

A consumption-based theory of asset pricing assumes that investors' preferences are based on their consumption rather than their wealth. Therefore, the pricing of risky assets should consider the rate of time preference (i.e., how much an individual prefers a good or service now compared to the future) and present and future marginal utility of wealth (i.e., how much an individual values additional wealth now and in the future). This results in a stochastic discount factor that reflects these preferences and is then used to discount the uncertain future returns of the asset. The other options (A, B, and C) do not fully capture the considerations necessary for a consumption-based theory.

Under a Consumption-Based Theory of the Pricing of Risky Assets,uncertain