The average expected rate of return on most ﬁnancial assets is the sum of the rates that compensate for
A) nondiversiﬁable risk and time preference.
B) diversiﬁable risk and time preference.
C) nondiversiﬁable and diversiﬁable risk.
D) nondiversiﬁable and diversiﬁable risk, and time preference.

Question

Quizplus · Accepted Answer

The average expected rate of return on most financial assets compensates for nondiversifiable risk (also known as systematic or market risk, which cannot be eliminated through diversification) and time preference (the preference for current consumption over future consumption, necessitating compensation for delaying consumption). Diversifiable risk, on the other hand, can be mitigated through diversification and thus does not typically require compensation in the expected rate of return.

The Average Expected Rate of Return on Most ﬁNancial Assets