The Certainty Equivalent Approach Adjusts the ____ for Risk in the ____

question 52

Multiple Choice

The certainty equivalent approach adjusts the ____ for risk in the ____ of the net present value equation.

• A) net cash flows; numerator
• B) risk-free rate; numerator
• C) required return; numerator
• D) net cash flows; denominator

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Definitions:

Portfolio Beta

An indicator of the level of systematic risk or volatility in a portfolio relative to the overall market.

Market Portfolio

A portfolio consisting of all assets available in the market, with each asset weighted according to its market capitalization.

Risk-free Rate

A hypothetical yield of an investment that is considered to have no financial risk, usually mirrored by the returns on government bonds.

Abnormal Return

The difference between the actual return of an investment and the expected return given its risk and the market's performance.