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 include compensation for both time preference and risk. Time preference refers to the fact that people generally prefer to have money now rather than in the future, so they require a higher rate of return to be willing to delay consumption. Risk refers to the uncertainty associated with future cash flows from the asset, and investors will also require compensation for taking on this risk. Therefore, the correct answer is A) the rate that compensates for time preference plus the rate that compensates for risk.

The Average Expected Rate of Return of a Financial Asset