Which of the following summarizes the classical theory of asset prices? I. An asset price equals the present value of expected income from the asset.
II) Expected income is the second best possible forecast based on all public information.
III) The interest rate in the present value formula is the safe interest rate plus a risk premium.
A)I only
B)II only
C)III only
D)I and III

Question

Quizplus · Accepted Answer

The classical theory of asset prices can be summarized by both statements I and III. Statement II is not a part of the classical theory. The theory states that asset prices are determined by the present value of expected income generated from the asset, and that the interest rate used in this formula is the safe interest rate plus a risk premium, which accounts for the uncertainty and risk associated with the investment.

Which of the Following Summarizes the Classical Theory of Asset