Final answer:
Investment risk and return profiles are assessed to determine the safest and riskiest investment options, and the one with the highest expected return. A firm considering a cash investment should weigh the potential 6% return against other available investment opportunities.
Step-by-step explanation:
The question relates to the evaluation of investments using different financial metrics and understanding the risk and return profiles of the investments. When assessing safest investments, one usually looks for lower risk, which often comes with lower variability in returns.
The riskiest investment would be one that has a higher potential for significant variation in returns, showing high volatility. The investment with the highest expected return would be the one offering the greatest return on average, but it may also come with increased risk.
If a firm is considering an investment with a 6% rate of return without the need to borrow, it should assess if the investment is higher than its opportunity cost of capital. Since the firm does not need to pay 8% interest on a loan, it can consider the investment reasonable if 6% is an acceptable return relative to what it could earn elsewhere. Otherwise, if there are alternatives providing higher than 6% with similar risk, it should reconsider.