A wildcat oil driller has enough capital to invest in only one project,that is,to drill one well in an East Texas oil field.A major oil company is drilling 100 wells in the same field.The probability of successfully striking oil is 10% for any well drilled in this field.Which of the following statements is most correct concerning the risk involved in these capital budgeting projects?

Question

Quizplus · Accepted Answer

The best measure of risk for the wildcat oil driller is project standing alone risk because the driller has only one project, and the success of that project will determine the success or failure of the entire venture. The major oil company, on the other hand, is diversified across multiple projects and wells, which would make contribution-to-firm risk more appropriate for measuring their overall risk. Systematic risk is a measure of the risk associated with the overall market and would not be appropriate in this case. Therefore, option D is the most appropriate choice.

A Wildcat Oil Driller Has Enough Capital to Invest in Only