The nominal risk-free return is the same for all investments throughout the market. However, there are as many different interest rates or expected returns as there are time horizons (ranging from one day to many years) and financial instruments (from passbook savings accounts to corporate stocks). The interest rates we observe in the economy differ from the nominal risk-free rate due to risk premiums. With the possible exception of Treasury bills, all investments are risky. Table A: Risk Classification Example Risk categories: Description Below-average risk: Replacement decisions that require no change, or only a minor change, in technology. No change in plant layout required. Discount rate ¼ Cost of capital 2%. Average risk: Replacement decisions involving significant changes in technology or plant layout; all cost-saving decisions; expansions and improvements in the firm’s main product lines. Discount rate ¼ Cost of capital. Above-average risk: Applied research and development; expansion of production or marketing efforts into developed economies in Europe and Asia. Discount rate ¼ Cost of capital þ 2%. High risk: Expansion of production or marketing efforts into lessdeveloped and emerging economies; introduction of products not related to any of the firm’s current product lines. Discount rate ¼ Cost of capital þ 5%. In sum, risk premium is the excess return on the risky asset that is the difference between expected returnonriskyassetsandthe returnonrisk-free assets.