Currently,Powell Products has a beta of 1.0,and its sales and profits are positively correlated with the overall economy.The company estimates that a 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 have more stand-alone risk than the firm's typical project.
B) The proposed new project would increase the firm's corporate risk.
C) The proposed new project would increase the firm's market risk.
D) The proposed new project would not affect the firm's risk at all.
E) The proposed new project would have less stand-alone risk than the firm's typical project.

Question

Quizplus · Accepted Answer

Statement a is true because the project has a relatively high standard deviation and thus more stand-alone risk than average.The project's revenues would be countercyclical to the rest of the firm's and to other firms' revenues;hence,its within-firm and market risks would be relatively low.

Currently,Powell Products Has a Beta of 1