Chartered Financial Analyst Level 1
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An investor evaluates three certificates of deposit (CDs) with identical maturity and default risk, each offering distinct interest rates. The opportunity cost of selecting CD 1, which yields 2.2%, is most accurately represented by:
An investor evaluates three certificates of deposit (CDs) with identical maturity and default risk, each offering distinct interest rates. The opportunity cost of selecting CD 1, which yields 2.2%, is most accurately represented by:
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Explanation:
The correct answer is C (2.2%). Since all three CDs share the same maturity and default risk, the opportunity cost of investing in CD 1 (2.2%) is the foregone return from the highest-yielding alternative, CD 3 (4.4%). The difference between these rates (4.4% - 2.2% = 2.2%) represents the opportunity cost. Options A and B are incorrect because they either ignore the foregone return or miscalculate it by averaging the returns, respectively.