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Using Boundless Presentations The Appendix The appendix is for you to use to add depth and breadth to your lectures. You can simply drag and drop slides from the appendix into the main presentation to make for a richer lecture experience. Free to edit, share, and copy Feel free to edit, share, and make as many copies of the Boundless presentations as you like. We encourage you to take these presentations and make them your own. Free to share, print, make copies and changes. Get yours at Boundless Teaching Platform Boundless empowers educators to engage their students with affordable, customizable textbooks and intuitive teaching tools. The free Boundless Teaching Platform gives educators the ability to customize textbooks in more than 20 subjects that align to hundreds of popular titles. Get started by using high quality Boundless books, or make switching to our platform easier by building from Boundless content pre-organized to match the assigned textbook. This platform gives educators the tools they need to assign readings and assessments, monitor student activity, and lead their classes with pre-made teaching resources. Get started now at: If you have any questions or problems please

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Risk Adjusting the Discount Rate Risk Adjusting for the Time Horizon Factors Impacting Capital Budgeting The Role of Risk in Capital Budgeting > Factors Impacting Capital Budgeting Free to share, print, make copies and changes. Get yours at rect&utm_source=boundless

The risks taken into account in modeling are typically grouped into credit risk, liquidity risk, market risk, and operational risk categories. Risk will increase with the amount of uncertainty involved in the investment ( i.e., the amount of possible outcomes associated with it). Risk will also increase due to the amount of variation in the possible outcomes. The Sharpe ratio characterizes how well the return of an asset compensates the investor for the risk taken. Risk-adjusted net present value is an alternative method to simple net present value, used to value future cash flows that are risky. The Monte Carlo evaluation method is used to value and analyze complex investments by simulating various sources of uncertainty affecting their value, and then determining their average value over the range of resultant outcomes. Risk Adjusting the Discount Rate Free to share, print, make copies and changes. Get yours at /risk-adjusting-the-discount-rate ?campaign_content=book_192_section_100&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boun dless Beta Equation View on Boundless.com The Role of Risk in Capital Budgeting > Factors Impacting Capital Budgeting

In terms of debt investments, default risk increases as the time horizon lengthens. Since stock investments have more time to overcome potential downturns in value, having a longer time horizon can justify more aggressive investing. When there are multiple possible outcomes, management of a firm may choose to undertake real options analysis in order to factor in the various possibilities. Risk Adjusting for the Time Horizon Free to share, print, make copies and changes. Get yours at /risk-adjusting-for-the-time-horizon ?campaign_content=book_192_section_100&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boundl ess Performance of Stocks, Bonds and Bills View on Boundless.com The Role of Risk in Capital Budgeting > Factors Impacting Capital Budgeting

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Key terms covariance A measure of how much two random variables change together. Risk free rate Risk-free interest rate is the theoretical rate of return of an investment with no risk of financial loss. salvage value The estimated value of an asset at the end of its useful life. time horizon The period of time the asset is expected to be held or a project is expected to last. Free to share, print, make copies and changes. Get yours at The Role of Risk in Capital Budgeting

Performance of Stocks, Bonds and Bills This graph gives an illustration of investing a dollar in different asset classes in the market from 1926 to the end of Free to share, print, make copies and changes. Get yours at Wikimedia. "Performance of stocks, bonds and bills." CC BY-SA View on Boundless.comCC BY-SA on Boundless.com The Role of Risk in Capital Budgeting

Beta Equation Beta is equal to the covariance between the return of the asset and the return of the market (or portfolio), divided by the variance in the returns of the market. Free to share, print, make copies and changes. Get yours at Wikipedia. "Beta (finance)." GNU FDL View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/Beta_(finance)View on Boundless.com The Role of Risk in Capital Budgeting

The Sharpe Ratio The equation for calculating the Sharpe Ratio Free to share, print, make copies and changes. Get yours at Wikipedia. "Sharpe ratio." GNU FDL View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/Sharpe_ratioView on Boundless.com The Role of Risk in Capital Budgeting

Free to share, print, make copies and changes. Get yours at The Role of Risk in Capital Budgeting Which of the following correctly defines a method used to adjust a company's discount rate for risk? A) The Monte Carlo method analyzes complex investments by simulating various sources of uncertainty. B) The Sharpe Ratio modifies the standard NPV calculation by adjusting each cash flow by its probability of occurrnce. C) rNPV is a measure of risk premium per unit of deviation in an investment asset. D) All of these answers.

Free to share, print, make copies and changes. Get yours at Boundless - LO. "Boundless." CC BY-SA BY-SA 3.0http:// The Role of Risk in Capital Budgeting Which of the following correctly defines a method used to adjust a company's discount rate for risk? A) The Monte Carlo method analyzes complex investments by simulating various sources of uncertainty. B) The Sharpe Ratio modifies the standard NPV calculation by adjusting each cash flow by its probability of occurrnce. C) rNPV is a measure of risk premium per unit of deviation in an investment asset. D) All of these answers.

Free to share, print, make copies and changes. Get yours at The Role of Risk in Capital Budgeting Which of the following statements regarding an investment's time horizon and its risk is correct? A) For some stock investments, a longer-term investment may be considered safer than short-term. B) It is important to diversify your investments based on how long each will be held. C) An investment with a longer time horizon will generally require a higher return. D) All of these answers.

Free to share, print, make copies and changes. Get yours at Boundless - LO. "Boundless." CC BY-SA BY-SA 3.0http:// The Role of Risk in Capital Budgeting Which of the following statements regarding an investment's time horizon and its risk is correct? A) For some stock investments, a longer-term investment may be considered safer than short-term. B) It is important to diversify your investments based on how long each will be held. C) An investment with a longer time horizon will generally require a higher return. D) All of these answers.

Attribution Wikipedia. "Real options analysis." CC BY-SA BY-SA 3.0http://en.wikipedia.org/wiki/Real_options_analysis Managing Money. "ManagingMoney.com Money Blog: Asset Allocation Tips." CC BY BY Wikipedia. "salvage value." CC BY-SA BY-SA 3.0http://en.wikipedia.org/wiki/salvage%20value Wiktionary. "time horizon." CC BY-SA BY-SA 3.0http://en.wiktionary.org/wiki/time+horizon OER Commons. CC BY BYhttp:// Wikipedia. "Monte Carlo methods in finance." CC BY-SA BY-SA 3.0http://en.wikipedia.org/wiki/Monte_Carlo_methods_in_finance Wikipedia. "Market risk." CC BY-SA BY-SA 3.0http://en.wikipedia.org/wiki/Market_risk Wikipedia. "RNPV." CC BY-SA BY-SA 3.0http://en.wikipedia.org/wiki/RNPV Wikipedia. "Credit risk." CC BY-SA BY-SA 3.0http://en.wikipedia.org/wiki/Credit_risk Wikipedia. "Liquidity risk." CC BY-SA BY-SA 3.0http://en.wikipedia.org/wiki/Liquidity_risk Wikipedia. "Risk modeling." CC BY-SA BY-SA 3.0http://en.wikipedia.org/wiki/Risk_modeling Wikipedia. "Sharpe ratio." CC BY-SA BY-SA 3.0http://en.wikipedia.org/wiki/Sharpe_ratio Wikipedia. "Risk premium." CC BY-SA BY-SA 3.0http://en.wikipedia.org/wiki/Risk_premium Wikipedia. "Beta (finance)." CC BY-SA BY-SA 3.0http://en.wikipedia.org/wiki/Beta_(finance) Wikipedia. "Operational risk." CC BY-SA BY-SA 3.0http://en.wikipedia.org/wiki/Operational_risk Wiktionary. "covariance." CC BY-SA BY-SA 3.0http://en.wiktionary.org/wiki/covariance Wikipedia. "Risk free rate." CC BY-SA BY-SA 3.0http://en.wikipedia.org/wiki/Risk%20free%20rate Free to share, print, make copies and changes. Get yours at The Role of Risk in Capital Budgeting