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Answer :
When it comes to capital budgeting, risk refers to the likelihood that an investment will not meet its expected return or that it will result in a loss. It's important to consider risk in capital budgeting because making large investments involves a certain level of uncertainty and potential for loss.
Risk can be quantified to some extent, but it's important to note that it's impossible to predict the future with absolute certainty. When risk is quantified, it is typically based on a combination of statistical analysis of historical data and subjective, judgmental estimates. Statistical analysis of historical data can provide valuable insights into the likelihood of certain events occurring and can help to identify patterns and trends. For example, analyzing past performance data for similar investments can help to identify the potential risks and returns of a new investment opportunity.
However, it's also important to consider subjective, judgmental estimates when quantifying risk. This can include input from experts in the industry, as well as consideration of factors that are difficult to predict or quantify with data. For example, changes in market conditions or unexpected events can have a significant impact on the success or failure of an investment. In summary, risk in capital budgeting refers to the likelihood of an investment not meeting its expected return or resulting in a loss. Risk can be quantified to some extent through a combination of statistical analysis and subjective, judgmental estimates. It's important to consider both types of analysis when making investment decisions in order to minimize risk and maximize returns.
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