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The point at which an investor decides whether or
not a particular security is worth purchasing. The cutoff point is
very subjective and will be based on the personal characteristics of
the individual investor. Some examples of personal characteristics
that may determine the cutoff point include the investor's required
rate of return and his or her risk aversion level.
Because
cutoff points are largely subjective, they will vary widely among
investors. For example, if an investor has a lower required rate of
return, he or she will likely pay more for the same security than a
person with a higher required rate of return. This translates into a
higher cutoff point for the first investor.
A cutoff point may also be considered a good "rule of thumb" when
considering particular securities, as it may help the investor make more consistent investment decisions.
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