If the Optimal Forecast of the Return on a Security

question 22

Multiple Choice

If the optimal forecast of the return on a security exceeds the equilibrium return,then

• A) the market is inefficient.
• B) an unexploited profit opportunity exists.
• C) the market is in equilibrium.
• D) only A and B of the above are true.
• E) only B and C of the above are true.

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Definitions:

NPV

Net Present Value, a method used in capital budgeting to assess the profitability of an investment or project.

Payback

Payback is the period of time required for the return on an investment to "pay back" the sum of the original investment, often used as a measure of investment risk.

Cash Flow

Cash flow signifies the net amount of cash and cash-equivalents being transferred into and out of a business, crucial for assessing its liquidity, flexibility, and overall financial performance.

Project's Payback

A calculation that determines the duration required for an investment to generate cash flows or profits enough to recover the initial investment cost.