A Firmʹs Decision to Invest in a Project Is Based

question 109

Multiple Choice

A firmʹs decision to invest in a project is based on the

• A) real interest rate and expected total revenue.
• B) nominal interest rate and expected total revenue.
• C) real interest rate and the expected profit.
• D) nominal interest rate and the expected profit.

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Definitions:

Risk-Free Rate

The interest rate at which an investor can lend money with no risk of default, often represented by the yield on government bonds.

APT

The Arbitrage Pricing Theory is a model that predicts asset returns based on the relationship between an asset's return and several macroeconomic factors.

CAPM

The Capital Asset Pricing Model, a model that describes the relationship between systemic risk and expected return for assets, particularly stocks.

Risk-Return Relationship

The principle that potential return increases with an increase in risk, describing the trade-off between the desire for the lowest possible risk and the highest possible return.