30 Questions
Why is discounting used in investment appraisal?
To reduce the future income to a present value equivalent
What is the primary benefit of diversification?
Reducing uncertainty regarding income
What is the formula to calculate the present value of a future income?
PV = X / (1 + r)^t
What is the purpose of the discount rate in investment appraisal?
To reduce the present value of future income
What is the primary reason why risk averse people buy insurance?
To avoid risk and ensure a certain income level
What is the Net Present Value (NPV) of an investment?
The present value of a future flow of income minus the initial cost of investment
What is the expected value of the property if the house is not insured and there is a 5% probability of a P10,000 loss?
P49,500
What is the benefit of buying the insurance policy in the example?
It eliminates the risk and ensures a certain income level
What is the present value of P1000 received in 5 years, with an annual discount rate of 10%?
P620.92
What is the significance of the discount factor in investment appraisal?
It reduces the present value of future income
What is the insurance premium in the example?
P500
What is the maximum amount the insurance company agrees to pay if the house is broken into?
P10,000
What is the primary function of a risk premium?
To compensate investors for taking risks
What occurs when an investor's risk aversion increases?
The risk premium increases
How is the risk-adjusted discount rate calculated?
By adding the risk premium to the discount rate
Which of the following investors has the highest risk-adjusted discount rate?
Investor C
What is the purpose of modifying the NPV formula to include a risk element?
To introduce a risk element into the discounting process
What is the initial cost of the investment project?
P40 000
What is the purpose of diversification in investing?
To maximize return while reducing risk
What is the probability of power cuts in 2021?
50%
What is the expected income if you sell only gas stoves and there are power cuts?
P30 000
What is the total income if you diversify and sell both gas stoves and electric stoves, regardless of whether there are power cuts or not?
P21 000
What is the advantage of diversifying and selling both gas stoves and electric stoves?
Stabilizes income
What is the income earned from electric stoves if you diversify and sell both gas stoves and electric stoves, and there are power cuts?
P6 000
What is the expected return on the total investment portfolio Rp in terms of b, Rm, and Rf?
Rp = bRm + (1-b)Rf
What is the relationship between the standard deviation of the return on the risky asset (σm) and the risk-free asset (σf)?
σm > σf
What is the expression for the standard deviation of the portfolio (σp) in terms of b and σm?
σp = bσm
What is the equation that describes the relationship between the portfolio risk σp and expected return Rp?
Rp = Rf + (Rm - Rf) / σp * σm
What is the intercept of the budget line described by the equation Rp = Rf + (Rm - Rf) / σm * σp?
Rf
What is the slope of the budget line described by the equation Rp = Rf + (Rm - Rf) / σm * σp?
(Rm - Rf) / σm
Learn about investment appraisal and the concept of discounting, which reduces future income to its present value equivalent. Understand why the value of money changes over time and how to calculate present value using a discount factor.
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