Question

11. How does an investor’s preference shift with the introduction of the risk free asset?

Answer 1

A risk free asset has certain rate of return and there is no possibility that they Will go worthless so there is a high sense of security provided to investors who invest in such securities.

The rate of return of such risk free Assets always remains low and there is low risk exposure & virtually no possibility of making any kind of losses so it is highly appropriate for investors who are looking for low return and highly conservative with a high degree of Risk aversion.

So Risk free assets are guaranteed against any kind of loss in value but it's purchasing power can go down based upon the different situations in economies.

It is highly preferred at the time when there is a very high level of uncertainty and there is low growth and very high volatility in equity markets , These risk free assets provides with a safe heaven.