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Suppose two assets, A and B, are equally liquid and are expected to pay identical dividends,...

Suppose two assets, A and B, are equally liquid and are expected to pay identical dividends, but B is considered more risky than A. Which asset will have the higher price and which will have the higher rate of return? Explain the reasons why. Make use of the demand and supply diagram for assets to illustrate and support your answer.

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Answer #1

Since, Asset A is less risky than B, Asset B must Offer higher rate of return to compensate for the Risk taken by the investor. For example, Mutual funds offer higher returns than the Bonds with certain and fixed returns.

Price Of Asset A will be higher as it is offering identical dividend with less risk.

** The demand of Asset B will be lower than the Asset A because of Risk involved. Demand decreases as Risks for that particular asset rises.

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