An increase in an asset’s expected return (relative to others), holding everything else constant, ________ the quantity demanded.

Question

BlackTom AI · Accepted Answer

Higher expected return makes an asset more attractive relative to alternatives, so investors buy more of it — the quantity demanded rises.

1) Relevant knowledge points and concepts
- Expected return: the anticipated payoff from holding an asset. Higher expected return increases the asset’s attractiveness.
- Ceteris paribus (holding everything else constant): risk, liquidity, and prices of other assets are unchanged.
- Quantity demanded in asset markets: the amount investors wish to hold at given characteristics; when an asset’s expected return rises (with other factors fixed), demand responds.
- Substitution effect: investors shift funds toward relatively higher-yielding assets.

2) Step-by-step reasoning
- Start with two assets, A and B, identical in risk and liquidity but different expected returns.
- If asset A’s expected return increases while asset B’s expected return and other factors remain fixed, asset A now offers a higher payoff per unit invested.
- Rational investors reallocate wealth toward the higher-return asset to maximize expected return for a given risk level.
- This reallocation increases the quantity of asset A demanded.

3) Calculations / intermediate steps
- No numerical calculation is required here; the logic is comparative: expected_return_A_new > expected_return_A_old (with others constant) ⇒ demand_A_new > demand_A_old.

4) Why the correct answer is correct
- The increase in relative expected return directly raises the marginal benefit of holding that asset. With unchanged risk and other attributes, the marginal benefit rises while marginal cost (price or risk) is fixed, so the optimal chosen quantity increases.

5) Why the other options are incorrect
- a. decreases: incorrect because a higher expected return does not reduce attractiveness; it increases it.
- b. has no effect on: incorrect because expected return is a primary determinant of demand; changing it changes investor behavior.
- d. erases: nonsensical in this context; higher expected return cannot “erase” quantity demanded.

Conclusion: Therefore the correct choice is c. increases, which matches the provided answer.

An increase in an asset’s expected return (relative to others), holding everything else constant, ________ the quantity demanded.Single choice

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