What Are Heuristics and Biases

question 73

Essay

What are heuristics and biases?

Comprehend the assumptions and limitations of the Capital Asset Pricing Model (CAPM).

Interpret beta values and their indication of a security's systematic risk level.

Understand the effects of portfolio diversification on risk.

Identify the impact of inflation and changes in risk aversion on the SML.

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Definitions:

Incremental Value

The additional or extra value generated by undertaking a new project or action, calculated as the difference in total value with and without the project.

Net Present Value

A method used in capital budgeting to evaluate the profitability of an investment, calculated by discounting future cash flows to the present value.

Company Stock

Shares of ownership in a corporation, representing a claim on the company's assets and earnings.

True Cost

The complete expense of a product or service, accounting for all financial, economic, and environmental factors.