If One Security Has a Greater Risk Than Another Security

question 10

Multiple Choice

If one security has a greater risk than another security, how will investors respond?

• A) They will require a lower rate of return for the investment that has greater risk.
• B) They would be indifferent regarding their expectation of rates of return for either investment.
• C) They will require a higher rate of return for the investment that has greater risk.
• D) None of the above.

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Definitions:

Simple Rate Of Return

The rate of return computed by dividing a project’s annual incremental net operating income by the initial investment required.

Salvage Value

The estimated residual value of an asset at the end of its useful life, representing what it could be sold for or scrapped.

Technologically Obsolete

Refers to products, services, or technology that have become outdated or no longer maintain a competitive advantage due to advancements in technology.

Simple Rate Of Return

A method to evaluate an investment's efficiency by dividing the annual incremental net operating income by the initial investment cost.