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Question 21.2: Explain what is meant by the constant level of risk assumpti...

Explain what is meant by the constant level of risk assumption.

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The constant level of risk assumption assumes that after a certain period of time, t, an instrument, X, if it has deteriorated is replaced with an instrument, Y, that has the same risk as X had originally. After a further period of time of length t, the instrument if it has deteriorated is again replaced with an instrument and has the same risk as X had originally, and so on.

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