Which of the following statements is True with regard to the ERR?
a. For a simple investment, the approximate ERR is greater than the IRR.
b. The precise ERR is a proxy for the IRR.
c. For a simple investment, the precise ERR is greater than the IRR.
d. The approximate ERR can be used to evaluate a project, whether a simple investment or not.
e. The approximate ERR is just a proxy for the IRR.
Investment refers to the money diverted in a productive activity so as to generate profit from it. The investment return required is higher for a highly risky venture. The return from investment can change with the market conditions.
Answer and Explanation:
Option (D) The approximate ERR can be used to evaluate a project, whether a simple investment or not. is correct
This option is correct because the use of ERR is pervasive as compared to IRR. The economic rate of return is true evaluation of the investment of a company. It is used to evaluate simple as well as complex investment project. It is a good indicator of economic health of a company.
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from Finance 305: Risk ManagementChapter 3 / Lesson 3