Which of the following statements about relevant risk and irrelevant risk is correct?
A)Relevant risk includes inflation risk, but excludes political risk.
B)Relevant risk includes interest rate risk, but excludes a firm's default risk.
C)Relevant risk includes economic risk, but excludes exchange rate risk.
D)Relevant risk includes exchange rate risk, but excludes inflation risk.
E)Relevant risk includes a firm's default risk, but excludes political risk.

Question

Quizplus · Accepted Answer

Relevant risks are those that affect the cash flows of an investment or project. Interest rate risk is relevant as it can affect the cost of financing the project, whereas a firm's default risk does not directly affect the project's cash flows.

Which of the Following Statements About Relevant Risk and Irrelevant