Question

Which of the following affect the expected rate of return on a security?

I. multiple states of the economy
II. probability of occurrence for any one economic state
III. market rate of return given a particular economic state
IV. security beta

Answer 1

Multiple factors affect the expected rate of return on a security, including multiple states of the economy, probability of occurrence for economic states, market rate of return given an economic state, and security beta. Hence, all the options are correct.

Step-by-step explanation:

The expected rate of return on a security is influenced by several factors:

1. Multiple states of the economy: The expected rate of return can vary depending on the state of the economy. For example, during a recession, the expected rate of return on a security may be lower compared to a period of economic growth.
2. Probability of occurrence for any one economic state: The likelihood of different economic states occurring can affect the expected rate of return. If a certain economic state is more probable, it may have a greater impact on the expected rate of return compared to less likely states.
3. Market rate of return given a particular economic state: The market rate of return for a security in a specific economic state can influence the overall expected rate of return. If the market rate of return is high, the expected rate of return may also be higher.
4. Security beta: The beta of a security, which measures its volatility compared to the overall market, can impact the expected rate of return. A security with a higher beta may have a higher expected rate of return but also higher risk.

Overall, these factors interact to determine the expected rate of return on a security.