The Appropriate Discount Rate Used in Decision Tree Methodology

question 44

Multiple Choice

The appropriate discount rate used in decision tree methodology

• A) should be risk-adjusted and risk may vary by period and decision node.
• B) should be risk-adjusted and risk may not vary by period and decision node.
• C) should not be risk-adjusted and risk may vary by period and decision node.
• D) should not be risk-adjusted and risk may not vary by period and decision node.
• E) None of the above are accurate.

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Definitions:

Market Portfolio

A theoretical portfolio that contains every asset in the market, weighted by market capitalization.

Security Market Line

A graphical representation of the expected return of investments as a function of their risk, specifically their beta.

Expected Return

The average of all the possible returns for an investment, weighted by their respective probabilities.

Beta

A measure of a stock's volatility in relation to the overall market, used to gauge a stock's risk level relative to the market average.