True or false: Expected return and inflation are the two components of risky return in the total return equation.True false question.TrueFalse

Assessing the Statement

The statement claims that expected return and inflation are the two components of risky return in the total return equation.

1. Definitions:

   • Total Return: This encompasses both the income generated by an investment (such as dividends or interest) and the capital gains or losses.
   • Risky Return: This typically refers to the portion of the return that compensates investors for taking on risk, beyond the risk-free rate.

2. Components of Returns:

   • The expected return typically consists of a risk-free rate plus a risk premium, which is the return expected for undertaking additional risk.
   • Inflation is a factor that affects real returns but is not a component of the risky return itself.

Conclusion

The claim is not accurate. Therefore, we determine that the answer is:

Final Answer

False. Expected return includes the risk-free rate and a risk premium, while inflation is a consideration that impacts real returns, not a component of the risky return.