This is correct answer

Most valuations of securities and investments are based on forecast cash flows and expected returns. This subjects risk associated with cash flows and returns to increased variability. Risk associated with forecast cash flows a year from now is likely to be less than the risk associated with forecast cash flows five years from now Since there is risk involved in forecast cash flows, financial decision makers require a risk premium to compensate for the risk that they would undertake. There is trade-off between risk and return that represents the balance between the lowest possible risk and the highest possible return for the risk. This relationship between risk and return is represented as follows: Required Rate of Return Risk-Free Rate of Return + Risk Premium The required rate of return can be broken down further into several components such as the inflation premium, default risk premium, liquidity risk premium, and so on. Based on your understanding of the components of required rate of return, identify the determinants with each characteristic described in the following table: Characteristic Component Real rate of return This is the rate for a short-term riskless security when inflation is expected to be zero This is the rate on a Treasury bill or a Treasury bond. This is the premium added as a compensation for the risk that an investor will not get paid in full. As interest rates rise, bond prices fall, and as interest rates fall, bond prices rise. Because interest rate changes are uncertain, this premium is added as a compensation for this uncertainty This is the premium added to the real risk-free rate to compensate for a decrease in purchasing power over time Default risk premium | Nominal risk-free rate Maturity risk premium Inflation premium