What concept does Jensen's Inequality illustrate?

Jensen's Inequality illustrates how the expected value of a function of a random variable can differ from the function of the expected value of that random variable, especially in the context of concave functions. This concept is particularly relevant in finance when considering expected returns and risk. For example, if an investor is evaluating the expected return of an asset, significant insight can be derived from the convexity or concavity of the return function.

The correct choice, which relates to the relationship between expected and average spot rates, aligns with the essence of Jensen's Inequality. When the expected value of the random variable is computed, applying the inequalities provides insights into the risk and return relationship over time. Typically, in financial assets, the expectation of the returns will differ from an average assessment due to the non-linear nature of returns and the inherent risks associated with those assets.

In contrast, the other options do not capture the essence of Jensen's Inequality effectively. Average rates of return do not directly relate to the inequality's implications on expected utility and are not necessarily indicative of the same mathematical insights. The expected price versus actual price of assets deals with market efficiency rather than the statistical properties of expected values. Lastly, the volatility of asset prices over time doesn't directly correlate to