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Risk Adjusted Discount Rate (RADR) Quiz

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Questions and Answers

What is the Risk-Adjusted Discount Rate (RADR) composed of?

A single component
Three components
The sum of two components (correct)
Many components

What does RADR stand for?

Risk Associated Discount Rate
Rate And Discount Risk
Risk Adjusted Discount Rate (correct)
Risk And Discount Rate

What is the university mentioned in the passage?

University of Applied Sciences and Technology
University of Technology
University of Technology and Science
University of Technology and Applied Sciences (correct)

What is the main purpose of the Risk-Adjusted Discount Rate (RADR)?

To account for the risk associated with a project or investment (A) Signup and view all the answers

What can be said about the RADR formula?

It is a formula with only two components (D) Signup and view all the answers

What are the two components of risk?

Risk-free rate and risk premium (B) Signup and view all the answers

What is the main advantage of using a risk-adjusted discount rate?

It is appealing to risk-averse investors and helps to reduce uncertainty (D) Signup and view all the answers

What is a disadvantage of using a risk-adjusted discount rate?

Getting an accurate risk premium is challenging (B) Signup and view all the answers

What is assumed about investors when using a risk-adjusted discount rate?

They are risk-averse (A) Signup and view all the answers

What is one of the types of risk that the risk-adjusted discount rate helps to overcome?

Credit risk (A) Signup and view all the answers

What is the formula for Risk Adjusted Discount Rate (RADR)?

Risk free rate + Risk Premium (B) Signup and view all the answers

What is the formula for Risk Premium under the Capital Asset Pricing Model (CAPM)?

(Market rate of return - risk free rate) * beta of the project (B) Signup and view all the answers

What is the purpose of the Risk Adjusted Discount Rate (RADR) in capital budgeting?

To adjust the discount rate to reflect the risk of an investment (B) Signup and view all the answers

What is the relationship between the Risk Premium and the beta of the project?

The Risk Premium is directly proportional to the beta of the project (D) Signup and view all the answers

What is the implication of a high beta of the project on the Risk Premium?

The Risk Premium will be higher (B) Signup and view all the answers