Which of the following statements is correct about adjusting for beta risk in capital budgeting?
A) It measures unsystematic risk.
B) It is a guaranteed measure of the success of the project.
C) The beta concept can be used to determine RADR.
D) It evaluates the efficiency of the management team.

Question

Quizplus · Accepted Answer

Adjusting for beta risk in capital budgeting involves using the concept of beta to determine the Risk-Adjusted Discount Rate (RADR), which is used to evaluate the potential return of a project while considering its inherent risk. Beta measures the systematic risk of an investment, which is the risk that is inherent in the market as a whole, and cannot be diversified away. By adjusting for beta risk, the RADR reflects the risk involved in the investment as well as the potential return. Therefore, it is not a measure of unsystematic risk (A), a guaranteed measure of success (B), or a measure of management efficiency (D).

Which of the Following Statements Is Correct About Adjusting for Beta