Tallant Technologies is considering two potential projects,X and Y.In assessing the projects' risks,the company estimated the beta of each project versus both the company's other assets and the stock market,and it also conducted thorough scenario and simulation analyses.This research produced the following data:
Correlation of the project cash flows with cash flows from currently existing projects.Cash flows are not correlated with the cash flows from existing projects.Cash flows are highly correlated with the cash flows from existing projects.
Which of the following statements is CORRECT?
A) Project X has more corporate (or within-firm) risk than Project Y.
B) Project X has more market risk than Project Y.
C) Project X has the same level of corporate risk as Project Y.
D) Project X has less market risk than Project Y.
E) Project X has more stand-alone risk than Project Y.

Question

Tallant Technologies is considering two potential projects,X and Y.In assessing the projects' risks,the company estimated the beta of each project versus both the company's other assets and the stock market,and it also conducted thorough scenario and simulation analyses.This research produced the following data: 
Correlation of the project cash flows with cash flows from currently existing projects.Cash flows are not correlated with the cash flows from existing projects.Cash flows are highly correlated with the cash flows from existing projects.
Which of the following statements is CORRECT?
A) Project X has more corporate (or within-firm) risk than Project Y. 
B) Project X has more market risk than Project Y. 
C) Project X has the same level of corporate risk as Project Y. 
D) Project X has less market risk than Project Y. 
E) Project X has more stand-alone risk than Project Y.

Quizplus · Accepted Answer

Statement b is true,while the other statements are false.Stand-alone risk is measured by standard deviation.Therefore,since Y's standard deviation is higher than X's,Y has higher stand-alone risk than X.Statement a is false because corporate risk is affected by the correlation of project cash flows with other company cash flows,and since Y's cash flows are more highly correlated with the cash flows of existing projects than X's,Y has more corporate risk than X.Market risk is measured by beta.Therefore,since X's beta is greater than Y's,statement b is true.

Tallant Technologies Is Considering Two Potential Projects,X and Y