Which of the following statements about opportunity costs is incorrect? Select o

Question

Which of the following statements about opportunity costs is incorrect?

Select one:

a. The opportunity cost rate to be applied to any investment is the rate of return that could be earned on alternative investments of similar risk.

b. In general, higher-risk investments should have higher opportunity costs than lower-risk investments have.

c. Opportunity cost rates are normally obtained by examining the returns on securities investments.

d. The opportunity cost rate typically is applied in discounting situations (as opposed to compounding).

e.

Say you just inherited $10,000. Because this money cost you nothing, it has an opportunity cost rate of zero.

Explanation / Answer

The opportunity cost is the cost an investor has sacrificed to earn a higher or lower return on the investment, and it has no relation with the risk inherited in investment. For example, if an investor choses to invest in security yielding 8% rather than investing in bond which is yielding 10% then his opportunity cost is 2% (10% - 8%).

Thus, the correct answer is option b.

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