ECONOMICS

Detailed explanation-1: -A risk-adjusted discount rate is the rate obtained by combining an expected risk premium with the risk-free rate during the calculation of the present value of a risky investment. A risky investment is an investment such as real estate or a business venture that entails higher levels of risk.

Detailed explanation-2: -Simply stated RADR calculation formula is the summation of – Prevailing Risk-free rate Plus Risk premium for the kind of risk proposed/expected. The formula for risk premium (under CAPM) is – (Market rate of return Less Risk-free rate) * beta of the project.

Detailed explanation-3: -When risk premium is added with risk-free rate to get the present value of a risky investment, it is called risk-adjusted discount rate (RADR). A risky investment refers to any investment that has a higher risk than normal investments.

Detailed explanation-4: -The risk adjusted discount rate (RADR) method is used as a valuation tool to assess projects that involve multi-period uncertain cash flows. Little research has been conducted to examine the validity of the RADR method.

Detailed explanation-5: -Examples of Risk-Adjusted Return Methods It is calculated by taking the return of the investment, subtracting the risk-free rate, and dividing this result by the investment’s standard deviation. All else equal, a higher Sharpe ratio is better.