The opportunity cost of capital for a risky project is
A) The expected rate of return on a government security having the same maturity as the project
B) The expected rate of return on a well-diversified portfolio of common stocks
C) The expected rate of return on a portfolio of securities of similar risks as the project
D) None of the above

Question

Quizplus · Accepted Answer

The opportunity cost of capital is the expected rate of return on a portfolio of securities with similar risks as the project. Option A is incorrect because a government security will have a lower risk profile than a risky project. Option B is incorrect because a well-diversified portfolio of common stocks may not have the same risk profile as the project, and the expected rate of return may not be a suitable benchmark for the project's opportunity cost of capital. Only option C is appropriate because it defines the opportunity cost of capital as the expected return on a portfolio of securities with comparable risk levels.

The Opportunity Cost of Capital for a Risky Project Is