Asked by Carlos Murray on Jul 07, 2024
Verified
If a capital budgeting project is a business in a particular field it may make sense to use a beta common to that field in the security market line to estimate a risk-adjusted rate for analysis of the project.
Beta
A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole, where a beta greater than one indicates higher than market volatility and less than one indicates lower.
Security Market Line
The Security Market Line graphically represents the expected return of assets as a function of their systematic, non-diversifiable risk.
Risk-Adjusted Rate
A rate of return that has been adjusted to take into account the risk or volatility of the investment, providing a more accurate measure of its potential reward.
- Understand the importance of risk adjustment in capital budgeting and the use of appropriate discount rates.
Verified Answer
KC
Katie CoffeyJul 13, 2024
Final Answer :
True
Explanation :
Using a beta common to the project's industry allows for a more accurate estimation of the project's risk-adjusted rate, as it takes into account the specific risks and market dynamics of that industry.
Learning Objectives
- Understand the importance of risk adjustment in capital budgeting and the use of appropriate discount rates.