Question 2 - Part b

In this lesson

1. 0:00 Evaluating the chief executive's discount rate adjustment
2. 0:29 Why investment risk doesn't justify rate changes
3. 1:14 Country risk index and government instability concerns
4. 2:31 Why standard deviation fails for diversified investors
5. 3:49 Foreign exchange risk and hedging strategies
6. 4:29 Market correlation and diversification effectiveness
7. 5:04 Time management in case study responses

About this lesson

You'll learn how to assess country risk, political instability, and foreign exchange factors against standard financial theory, and understand why diversified investors may not require premium adjustments for certain risks. This is a critical evaluation skill for Advanced Financial Management, where you need to balance practical risk considerations with theoretical principles—and crucially, manage your time effectively across multi-part questions. The video walks you through the key distinction: the underlying investment doesn't change business or financial risk, so the original 13% discount rate may already be justified. You'll explore the chief executive's arguments around country risk indices and government changes, then examine why standard deviation isn't the most appropriate measure when investors are well diversified and can hedge foreign exchange exposure. The tutor emphasises that while some risks warrant a premium (like undiversifiable political risk), others—like forex risk—are better managed through hedging strategies than discount rate adjustments. The practical takeaway is learning how to construct a balanced, time-efficient response that acknowledges both sides of the argument without getting lost in NPV calculations. By targeting 3–4 marks in this part, you'll protect your overall exam performance and demonstrate the evaluative thinking that Advanced Financial Management demands.

Duration: 6m