CFA Practice Question

There are 233 practice questions for this study session.

CFA Practice Question

The opportunity cost of capital for a risky project is the expected rate of return on a ______.

A. government security with the same maturity as the project.
B. well-diversified portfolio of common stocks.
C. portfolio of securities with similar risk to that of the project
Correct Answer: C

User Contributed Comments 8

User Comment
niti why should alternate investment be of same risk?
mtcfa Becasue of the required rate of return (i.e. the discount rate, which investors require for a given level of risk), and therefore managers must choose from among projects with the same risk level. You must compare apples to apples.
sarath The alternative investment should be of the same risk otherwise it will not be a meaningful comparison...
Rotigga Of course the difficult part in the real world is quantifying risk ...
moneyguy More risk, more reward! Except when you lose...
Inaganti6 in the real world how can you define risk or quantify two projects as having same risk...... if you were the CEO of a coal mining company how can you possibly tell if it's better to invest $1 billion on an undeveloped mine or whether it's better to acquire a $1 billion stake in an existing operation
CIDan Obviously it's impossible to know exactly what your risk is, but you can assume decision maker is rational with investment knowledge. The decision maker could use a binomial model to then estimate risk based on the estimated probability of certain outcomes.
ctate C is not correct, it is the return from the best alternative use of cash/resources used. There is no specfication as to whether that alternative use has to have a similar risk outlook
You need to log in first to add your comment.