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Formula for the Risk-Adjusted Discount Rate
The risk-adjusted discount rate, , is used to evaluate investments with uncertain outcomes. It is benchmarked against the interest rate on market assets that share a similar level of risk. This rate is calculated by adding a risk premium (RP) to the risk-free rate (), as shown in the formula . The risk premium, which is strictly positive, represents the additional return required to persuade an investor to choose a risky asset over a risk-free alternative, which would otherwise be the preferred option.
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Formula for the Risk-Adjusted Discount Rate
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