The required return on an asset is an increasing function of its nondiversifiable risk.

Question

Quizplus · Accepted Answer

This statement is true according to the fundamental principle of finance, which states that the expected return on an asset is directly proportional to its nondiversifiable risk or systematic risk. This is because investors require a higher return to compensate for the higher risk associated with the asset. Nondiversifiable risk is also known as systematic risk because it affects the entire market or a large part of it, and it cannot be eliminated by diversification. Examples of systematic risk include interest rate risk, inflation risk, political risk, and natural disasters.

The Required Return on an Asset Is an Increasing Function