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Portfolio Risk and Return: Budget Line

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Questions and Answers

What is the primary reason for using discounting in project appraisal?

To determine the utility maximizing portfolio
To calculate the expected value of a lottery
To account for the degree of risk aversion of decision makers (correct)
To measure the riskiness of an investment portfolio

What is the risk-adjusted discount rate used for in project appraisal?

To determine the utility maximizing portfolio
To measure the riskiness of an investment portfolio
To calculate the expected return of an investment portfolio
To account for the degree of risk aversion of decision makers (correct)

What is the net present value (NPV) used for in investment appraisal?

To determine the utility maximizing portfolio
To determine the viability of a project (correct)
To calculate the expected return of an investment portfolio
To measure the riskiness of an investment portfolio

What is risk aversion in the context of investment decision making?

A preference for certain outcomes over uncertain ones (D) Signup and view all the answers

What is the purpose of calculating the expected return of an investment portfolio?

To evaluate the performance of an investment portfolio (C) Signup and view all the answers

How can an individual reduce risk in an investment portfolio?

By diversifying the portfolio (C) Signup and view all the answers

What is the relationship between risk and return in an investment portfolio?

Higher risk is associated with higher returns (A) Signup and view all the answers

What is the purpose of uncertainty analysis in investment decision making?

To evaluate the potential outcomes of an investment under different scenarios (D) Signup and view all the answers

What is the role of discounting in uncertainty analysis?

To account for the time value of money and risk aversion (B) Signup and view all the answers

What is the relationship between risk aversion and the demand for risky assets?

Risk-averse individuals demand fewer risky assets (D) Signup and view all the answers