1. Project risk versus portfolio risk Aa Aa E Consider a firm to be a portfolio of several projects. The contribution of a project's risk to the firm's risk will be referred to as the beta risk of a project. This is different from the total risk involved in a particular project itself. The of a project refers to the risk involved with the success or failure of a project. stand-alone risk portfolio risk Consider the following case: Ean owns a smart phone application development company. The cost involved in developing a new application is around $5,000. Given that there are thousands of mobile phone applications in the market, the probability of an application becoming successful in the market is 24%. However, if it is successful, each app can generate profits up to $50,000. Ean's company develops more than 12 applications a year and records the entire development cost of the application as a loss if any app is not successful. Ean's company can expect to earn return. Classifying the 76% failure rate as "high risk" in the industry, this example shows that: O O A project with high project risk may not have high beta or systematic risk. A project with high project risk may have high beta or systematic risk. Ean is thinking about expanding into the mobile phone accessory retail business. Sales of mobile phone accessories increase when the economy is doing well and decrease when there is an economic slowdown. The beta of the retail mobile accessory business is higher than the mobile application development business, and the businesses are positively correlated. With this expansion, the beta of Ean's firm is likely to decrease increase It is important for diversified firms as well as small business owners like Ean to evaluate their project risk along with their beta risk. There are several methods of evaluating project risk. When comparing two projects, when is the standard deviation of a project's cash flows an appropriate measure of project risk? O When the two projects have the same project outlay When the two projects have different project outlay