A risky asset offers high positive returns during business downturns. A colleague argues that the nominal required rate of return on the asset may be less than the nominal risk-free rate. Is the colleague correct?
- No, the return must be higher than the nominal risk-free rate.
- No, the relationship between the asset’s nominal return and the nominal risk-free rate is indeterminate.
I don’t quite understand why A is correct. My arguing is like this: for the risky asset offers high positive returns during business downturns, the required rate of return must be more than the nominal risk-free rate so the future cash flow will be discounted with a larger number to get a higher interest return.