Answer: The higher the expected payoff of an asset in bad times, the lower the asset's expected return

## Explanation The correct relationship is: **The higher the expected payoff of an asset in bad times, the lower the asset's expected return**. This is based on **consumption-based asset pricing theory**: - **Bad times** refer to periods when consumption is low and marginal utility is high - Assets that pay off well during bad times provide valuable **consumption insurance** - Investors are willing to **pay more** (accept lower returns) for assets that protect them during economic downturns - This creates an **inverse relationship** between expected returns and payoffs during bad times **Key concepts:** - Assets with high payoffs during bad times are like insurance policies - They command higher prices, leading to lower expected returns - This explains why defensive stocks (utilities, consumer staples) typically have lower expected returns than cyclical stocks - The relationship is driven by investor risk aversion and the desire for consumption smoothing

Author: LeetQuiz .