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      Question

      The risk adjusted discount rate can be calculated by

      the following method:
      A Dividend discount model Correct Answer Incorrect Answer
      B Free cash flow method Correct Answer Incorrect Answer
      C Capital Asset Pricing Model Correct Answer Incorrect Answer
      D None of the above Correct Answer Incorrect Answer
      E Either a or b Correct Answer Incorrect Answer

      Solution

           The Capital Asset Pricing Model (CAPM) describes the relationship between systematic   risk (i.e. non-diversifiable risks) and expected return for equity. As such, it compensates the investors by giving the risk premium for undertaking the systematic risk.

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