Answer (C) is correct . Rational investors choose projects that yield the best return given some level of risk. If an investor desires no risk, that is, an absolutely certain rate of return, the risk-free rate is used in calculating net present value. The risk-free rate is the return on a risk-free investment such as government bonds. Certainty equivalent adjustments involve a technique directly drawn from utility theory. It forces the decision maker to specify at what point the firm is indifferent to the choice between a sum of money that is certain and the expected value of a risky sum.
Answer (A) is incorrect because A risk-adjusted discount rate does not represent an absolutely certain rate of return. A discount rate is adjusted upward as the investment becomes riskier.
Answer (B) is incorrect because The cost of capital has nothing to do with certainty equivalence.
Answer (D) is incorrect because The cost of equity capital does not equate to a certainty equivalent rate.
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