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 security of similar risk as the project.
D)the expected rate of return on a typical bond portfolio.

Question

Quizplus · Accepted Answer

The opportunity cost of capital for a risky project is the expected rate of return on a security of similar risk as the project. This is because investors would only invest in the risky project if they expect to earn a higher return than the return they could earn on a security of similar risk. Choices A, B, and D do not account for the higher risk of the project and are not appropriate measures of opportunity cost in this scenario.

The Opportunity Cost of Capital for a Risky Project Is