When we compute the cost of equity capital for a project we assume that the ________ of the project is equivalent to the average risk of the firm's investments.

Question

Quizplus · Accepted Answer

The cost of equity capital is computed based on the project's market risk, which is the risk that cannot be diversified away and is equivalent to the average risk of the firm's investments. Therefore, the best choice is D, market risk. Choices A, B, and C are incorrect because they relate to specific types of risk that can be diversified away or eliminated through proper portfolio management.

When We Compute the Cost of Equity Capital for a Project