Imperfect asset substitutability assumes
A) the returns on foreign and domestic currency bonds are identical.
B) the returns on foreign and domestic currency are unrelated.
C) the risks of holding foreign and domestic currency are identical.
D) the risks of holding foreign and domestic currency are unrelated to returns.
E) the returns on foreign and domestic currency differ and are influenced by risk.

Question

Quizplus · Accepted Answer

Imperfect asset substitutability assumes that the returns on foreign and domestic currency differ and are influenced by risk. This means that there may be some substitutability between foreign and domestic currency investments, but it is not complete. The risks and returns of each investment are not identical or completely unrelated, which limits the degree to which they can be substituted for one another. Therefore, investors may choose to hold some of each to diversify their portfolios and manage risk.

Imperfect Asset Substitutability Assumes