Reducing the Number of Possible Investments

D

The answer to this question is C. Discounting.

In order to reduce the huge number of possible investments to a smaller number that can be investigated carefully, it is necessary to apply a filtering process that eliminates those investments that do not meet certain criteria. This filtering process is known as "screening" and is typically used by investment professionals to select a subset of potential investments from a larger universe.

One common method of screening is to apply various quantitative and qualitative criteria to the universe of potential investments. These criteria may include factors such as the company's financial performance, management quality, industry trends, market capitalization, and so on. By applying these criteria, investment professionals can narrow down the list of potential investments to a smaller, more manageable number.

Discounting is one of the quantitative criteria that can be used in the screening process. It refers to the process of adjusting the value of future cash flows to their present value, based on an assumed discount rate. By discounting the future cash flows of a potential investment, investment professionals can compare the present value of those cash flows to the cost of acquiring the investment. This helps them to determine whether the investment is likely to generate a positive return on investment.

In summary, discounting is a necessary tool for reducing the universe of potential investments to a smaller number that can be investigated carefully. By applying various screening criteria, including discounting, investment professionals can identify the investments that are most likely to generate a positive return on investment.