An Asset's Beta Can Be Used to Compute Its Discount

question 121

Multiple Choice

An asset's beta can be used to compute its discount rate for an NPV calculation because the discount rate is equal to:

• A) r_f + b(r_m + r_f).
• B) r_f - b(r_m + r_f).
• C) r_f - b(r_m - r_f).
• D) r_f + b(r_m - r_f).
• E) beta itself.

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Definitions:

Standard Deviation

A measure of the dispersion or variability of a set of data points around the mean, commonly used in finance to represent the volatility or risk associated with a particular investment.

Expected Return

A measure of the average likely profit or loss on an investment considering past performance or future forecasts.

Beta

A measure of a stock's volatility in relation to the overall market; a higher beta means higher risk but potentially higher returns.

Business-Specific Risk

The risk associated with the particular operations, industry, or market of a specific company, apart from the general market risks.