5. The real risk-free rate is affected by a two factors: a. The relative ease or

Question

5. The real risk-free rate is affected by a two factors: a. The relative ease or tightness in capital markets and the expected rate of inflation. b. The expected rate of inflation and the set of investment c. The relative ease or tightness in capital markets and the d. Time preference for income consumption and the relative e. Time preference for income consumption and the set of opportunities available in the economy. set of investment opportunities available in the economy. ease or tightness in capital markets. investment opportunities available in the economy.

Explanation / Answer

The real risk-free rate is not affected by the expected rate of inflation. In economic theory, the real risk-free rate is affected by the time preference by individuals for current and future consumption. Also, investment opportunities available in the economy affect the real rate of return and hence the risk-free rate.

Thus the option (e) is correct.

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