why does the pricing of risky assets depend on the existence of opportunities to borrow and lend at the riskless rate of return

Question

anonymous · Answer

The justification of this is based on the so-called risk neutral valuation, which states that the risk free rate is the the proper discount rate for all securities. The motivation behind this statement is the Efficient Market Hypothesis (EMH). It states that current market price contains all available information so the expected return is only a function of risk free rate.