Marginal Rate Substitution: This financial term refers to the rate at which investors are willing to substitute one asset for another. It looks at how much a particular investment (such as a stock or bond) becomes more attractive or less expensive relative to others when the investor’s overall portfolio grows. The idea is that as the portfolio size increases, investors can choose investments with higher returns and lower risks. In other words, they are trading off a bit of potential return in exchange for a decrease in risk. Therefore, marginal rate substitution can be used to understand an investor’s willingness to take on additional risk in order to potentially increase returns.