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4. Risk and Return Considerations Risk and Return The Role of Risk in Capital Budgeting > Risk and Return Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance?campaign_content=book_192_section_98&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=dir ect&utm_source=boundless

5. The general progression in the risk-return spectrum is: short-term debt, long-term debt, property, high-yield debt, and equity. When a firm makes a capital budgeting decision, they will wish, as a bare minimum, to recover enough to pay the increased cost of goods due to inflation. Risk aversion is a concept based on the behavior of firms and investors while exposed to uncertainty to attempt to reduce that uncertainty. Beta is a measure firms can use in order to determine an investment's return sensitivity in relation to overall market risk. Risk and Return Considerations Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/the-role-of-risk-in-capital-budgeting-12/risk-and-return-98/risk-and-return- considerations-425- 10899?campaign_content=book_192_section_98&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boun dless Inflation View on Boundless.com The Role of Risk in Capital Budgeting > Risk and Return

6. Free to share, print, make copies and changes. Get yours at www.boundless.com Appendix

7. Key terms inflation An increase in the general level of prices or in the cost of living. political risk the potential loss for a company due to nonmarket factors as macroeconomic and social policies systematic risk The risk associated with an asset that is correlated with the risk of asset markets generally, often measured as its beta. Free to share, print, make copies and changes. Get yours at www.boundless.com The Role of Risk in Capital Budgeting

8. Inflation Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikimedia. "Inflation." Public domain http://commons.wikimedia.org/wiki/File%253AInflation.png View on Boundless.comPublic domainhttp://commons.wikimedia.org/wiki/File%253AInflation.pngView on Boundless.com The Role of Risk in Capital Budgeting

9. Free to share, print, make copies and changes. Get yours at www.boundless.com The Role of Risk in Capital Budgeting An individual's investment portfolio is composed of $50,000 worth of short-term corporate bonds and $75,000 of long-term US treasuries. Based on the composition of this portfolio, this person is probably _______. A) Risk-averse. B) Risk-neutral. C) Risk-seeking. D) Risk-loving.

10. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ The Role of Risk in Capital Budgeting An individual's investment portfolio is composed of $50,000 worth of short-term corporate bonds and $75,000 of long-term US treasuries. Based on the composition of this portfolio, this person is probably _______. A) Risk-averse. B) Risk-neutral. C) Risk-seeking. D) Risk-loving.

11. Free to share, print, make copies and changes. Get yours at www.boundless.com The Role of Risk in Capital Budgeting A standard rule in finance is to: A) accept more risk only if the expected return is higher. B) accept more risk only if the expected return is positive. C) accept more risk only if the standard deviation is positive. D) accept more risk only if the standard deviation is higher.

12. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Saylor OER. "Business Administration « Saylor.org – Free Online Courses Built by Professors." CC BY 3.0 http://www.saylor.org/majors/Business/CC BY 3.0 http://www.saylor.org/majors/Business/ The Role of Risk in Capital Budgeting A standard rule in finance is to: A) accept more risk only if the expected return is higher. B) accept more risk only if the expected return is positive. C) accept more risk only if the standard deviation is positive. D) accept more risk only if the standard deviation is higher.

13. Attribution Wikibooks. "Real Estate Financing and Investing/Understanding Return and Risk." CC BY-SA 3.0 http://en.wikibooks.org/wiki/Real_Estate_Financing_and_Investing/Understanding_Return_and_Risk#Risk_and_the_Risk- Return_Trade_OffCC BY-SA 3.0 http://en.wikibooks.org/wiki/Real_Estate_Financing_and_Investing/Understanding_Return_and_Risk#Risk_and_the_Risk- Return_Trade_Off Wikipedia. "Risk aversion." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Risk_aversionCC BY-SA 3.0http://en.wikipedia.org/wiki/Risk_aversion Wikipedia. "Beta (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Beta_(finance)CC BY-SA 3.0http://en.wikipedia.org/wiki/Beta_(finance) Wikipedia. "Interest." CC BY-SA 3.0 http://en.wikipedia.org/wiki/InterestCC BY-SA 3.0http://en.wikipedia.org/wiki/Interest Wikipedia. "Risk-return spectrum." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Risk-return_spectrumCC BY-SA 3.0http://en.wikipedia.org/wiki/Risk-return_spectrum Wikipedia. "Political risk." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Political_riskCC BY-SA 3.0http://en.wikipedia.org/wiki/Political_risk Wiktionary. "inflation." CC BY-SA 3.0 http://en.wiktionary.org/wiki/inflationCC BY-SA 3.0http://en.wiktionary.org/wiki/inflation Wiktionary. "systematic risk." CC BY-SA 3.0 http://en.wiktionary.org/wiki/systematic+riskCC BY-SA 3.0http://en.wiktionary.org/wiki/systematic+risk Free to share, print, make copies and changes. Get yours at www.boundless.com The Role of Risk in Capital Budgeting