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Question
In Risk-Adjusted Discount Rate method, __________ has to be adjusted.
In Risk-Adjusted Discount Rate method, __________ has to be adjusted.
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Solution
The correct option is C Rate of discount
The use of risk adjusted discount rate is based on the concept that investors demands higher returns from the risky projects. The required return of return on any investment should include compensation for delaying consumption equal to risk free rate of return, plus compensation for any kind of risk taken on. Risk associated with any investment project is higher than risk involved in a similar kind of project, Discount rate is adjusted upward in order to compensate this additional risk borne.
The use of risk adjusted discount rate is based on the concept that investors demands higher returns from the risky projects. The required return of return on any investment should include compensation for delaying consumption equal to risk free rate of return, plus compensation for any kind of risk taken on. Risk associated with any investment project is higher than risk involved in a similar kind of project, Discount rate is adjusted upward in order to compensate this additional risk borne.
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