Wansley Enterprises is considering a new project.The company has a beta of 1.0, and its sales and profits are positively correlated with the overall economy.The company estimates that the proposed new project would have a higher standard deviation and coefficient of variation than an average company project.Also, the new project's sales would be countercyclical in the sense that they would be high when the overall economy is down and low when the overall economy is strong.On the basis of this information, which of the following statements is CORRECT?
A) The proposed new project would increase the firm's corporate risk.
B) The proposed new project would increase the firm's market risk.
C) The proposed new project would not affect the firm's risk at all.
D) The proposed new project would have less stand-alone risk than the firm's typical project.
E) The proposed new project would have more stand-alone risk than the firm's typical project.

Question

Quizplus · Accepted Answer

The fact that the proposed new project has a higher standard deviation and coefficient of variation than an average company project indicates that it has more stand-alone risk than the firm's typical project. Additionally, the fact that the new project's sales are countercyclical means that it would not diversify the firm's portfolio and would actually add to the firm's overall risk. Therefore, choice E is correct.

Wansley Enterprises Is Considering a New Project