An estimation of the opportunity cost of capital for projects that have an "average" level of risk is the rate of return on:
A)treasury bills.
B)the market portfolio.
C)the market portfolio minus the rate of return on treasury bills.
D)treasury bonds plus a maturity premium.

Question

Quizplus · Accepted Answer

The rate of return on the market portfolio, represented by a broad-based market index such as the S&P 500, is typically used as an estimation of the opportunity cost of capital for projects with an average level of risk. This is because the market portfolio represents the overall level of risk and return in the market, and projects with average risk are expected to generate returns similar to those of the overall market. Choosing A, C, or D would not accurately reflect the opportunity cost of capital for projects with average risk.

An Estimation of the Opportunity Cost of Capital for Projects