Please mark the following as either True or False ___ The formula of the approxi

Question

Please mark the following as either True or False

___ The formula of the approximations of the real return becomes less accurate as the rate of inflation increases.

___ When deciding between a risky asset (or portfolio) and a risk-free asset, the more risk averse the investor, the greater the proportion they will choose to invest in the risky asset

(Hint: see Chapt 7).

___ For a given set of possible cash flows, as the required risk premium for a project increases, its price must decrease to entice investors to purchase the asset.

Explanation / Answer

Statement Analysis True/ False ___ The formula of the approximations of the real return becomes less accurate as the rate of inflation increases. Formula for real rate works at each level of inflation rate False ___ When deciding between a risky asset (or portfolio) and a risk-free asset, the more risk averse the investor, the greater the proportion they will choose to invest in the risky asset Risk Averse means who like taking risks for higer return and hence a risk averse inventry would like to incest in risky assets True ___ For a given set of possible cash flows, as the required risk premium for a project increases, its price must decrease to entice investors to purchase the asset. The price of the assets is initial cash outflow for the project and if the risk premium for future cash flows increases, then to make project of positive NPV , the price shold decrease True

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