It is ________ that determines the cost of capital.
A) diversifiable risk
B) non-systematic risk
C) market risk
D) total risk

Question

Quizplus · Accepted Answer

The cost of capital is determined by the level of market risk or systematic risk that an investment project, business or portfolio is exposed to. Market risk is non-diversifiable risk and cannot be eliminated through diversification, hence it is the most relevant factor for determining the cost of capital. Non-systematic risk or diversifiable risk can be eliminated or reduced through diversification and is not relevant in determining the cost of capital. Total risk is the sum of systematic and non-systematic risk, thus it cannot be used to determine the cost of capital in isolation.

It Is ________ That Determines the Cost of Capital