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      Question

      A firm evaluates two projects with identical expected

      cash flows, but Project A has higher variability. If the firm is risk-averse, what would be its decision?
      A Prefer Project A due to potential for high return Correct Answer Incorrect Answer
      B Indifferent to both projects Correct Answer Incorrect Answer
      C Prefer Project with lower standard deviation Correct Answer Incorrect Answer
      D Choose project with higher NPV only Correct Answer Incorrect Answer

      Solution

      Risk-averse firms prefer certainty. Given equal expected returns, lower standard deviation (risk) is preferable. This is aligned with decision-making under uncertainty.

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