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    Risk and Return

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    Please help with the following problem.

    When using discounted cash flow analysis to value an asset, explain why it is important to measure the risk of the asset and to associate an expected return with that risk measure.

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    Solution Preview

    The response addresses the queries posted in 515 words with references.

    The first section of the paper discusses the 'Cash Flow Approach' that can be used to measure the value of an asset. It also explains that why is it necessary to measure the various risks and returns associated with an asset.

    The discounted cash flow approach is theoretically the most appropriate valuation approach. This method is used to value assets on the basis of the concepts of the time value of money. The value of the assets depends on the expected future cash flow and discount rate. As we are dealing with future cash flows, we have to consider the risk element because of the vagueness of future and to avoid losses. The discount rate depends on the risk of expected cash flows I.e. Uncertainty of future ...

    Solution Summary

    The following posting helps explains why it is important to measure the risk of the asset and associate an expected return with risk measure. The explanation is given in 410 words.