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What is the relationship between risk and the attractiveness of an investment?
What is the relationship between risk and the attractiveness of an investment?
- As risk increases, the investment becomes more attractive due to the potential for higher returns.
- Risk has no impact on the attractiveness of an investment.
- As risk increases, the investment becomes less attractive due to heightened uncertainty and potential for loss. (correct)
- The relationship between risk and investment attractiveness depends on the investor's risk tolerance.
How does higher risk typically affect the net present value (NPV) of a project?
How does higher risk typically affect the net present value (NPV) of a project?
- Higher risk leads to a higher NPV as investors expect higher returns.
- Higher risk may lead to either a higher or lower NPV, depending on the specific project.
- Higher risk leads to a lower NPV as future cash flows become less certain and subject to higher discount rates. (correct)
- Higher risk has no impact on the NPV.
What is the effect of increased risk on the cost of capital?
What is the effect of increased risk on the cost of capital?
- The cost of capital increases as investors demand higher returns to compensate for increased risk. (correct)
- The effect of risk on the cost of capital depends on the specific industry.
- The cost of capital decreases as investors demand lower returns for higher risk.
- The cost of capital remains unchanged, regardless of the level of risk.
How does increased risk affect the discount rate used to evaluate a project?
How does increased risk affect the discount rate used to evaluate a project?
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Which of the following statements is true regarding the financial dynamics of a project with higher risk?
Which of the following statements is true regarding the financial dynamics of a project with higher risk?
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