The Potential Combinations of a Riskfree Lending with a Risky

question 2

Multiple Choice

The potential combinations of a riskfree lending with a risky portfolio results in a plot of expected returns and standard deviations of

• A) straight line with negative slope.
• B) a nonlinear curve with increasing, positive slope.
• C) straight line with positive slope.
• D) a nonlinear curve with a decreasing, negative slope.

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Definitions:

Net Present Value

A financial metric that calculates the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

Project Profitability Index

A financial metric that compares the present value of a project's expected cash flows to its initial investment, used to evaluate the relative profitability of investments.

Discount Rate

The rate of interest applied in DCF evaluations to estimate the current worth of future cash inflows.

Net Present Value

The difference between the present value of cash inflows and the present value of cash outflows over a period, used in capital budgeting to assess profitability.