The Required Rate of Return on an Asset Is NOT

question 2

Multiple Choice

The required rate of return on an asset is NOT a function of the ____.

• A) risk associated with the asset
• B) risk-free interest rate
• C) age of the asset
• D) All of these are correct

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Definitions:

Moral Hazard

The situation where one party takes risks because they know they will not bear the full consequences of their actions, often due to asymmetric information or contracts.

Supply Curve

A visual model that illustrates the association between the pricing of goods and their supply quantity.

Diversification

Reducing risk by investing in several different things, so that the possible losses are independent events.

Pooling

A strong form of diversification in which an investor takes a small share of the risk in many independent events, so the payoff has very little total overall risk.