Question

Statement 1: The actual relationship between the risk-free rate of return ( r* ) and the expected future inflation rate or inflation premium (IP) is actually multiplicative—that is, [(1 + rRF ) x (1 + IP)] – 1—but it is often simplified to reflect an additive relationship. Statement 2: All else being equal, the more highly that savers and investors prefer immediate spending to deferred consumption, the lower the compensation that savers and investor will require to induce them to make an investment that will necessitate postponed spending. Statement 3: A risk-free asset is one characterized by guaranteed returns, whereas the cash flows of a risky asset may be greater or less than the expected or promised returns. Statement 4: For the average rational investor or saver, there is an indirect, or inverse, relationship between the amount of risk exhibited by a security and the risk premium that would be required by the investor or saver.

The true statements are:

2 and 4

1, 2, and 3

1 and 3

1, 2, 3, and 4

Answer 1

The true statements are:

1,2,3 &4

All the statements are true here.

Statement 1: the relationship is given right there.

Statement 2: The statement is correct.

Statement 3: The asset is termed risk free when it gives guaranteed return.

Statement 4: A average investor will do the same.