1. Project risk versus portfolio risk 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 risk in a project that does not take into account the impact of diversification within a company is referred to as the project's risk. total Consider the following case: beta Hector owns a smart phone application development company. The cost involved in developing a new application is around $15,000. Given that there are thousands of mobile phone applications in the market, the probability of an application becoming successful in the market is 40%. However, if it is successful, each app can generate profits up to $150,000. Hector's company develops more than 16 applications a year and records the entire development cost of the application as a loss if any app is not successful. Hector's company can expect to earn return Classifying the 60% failure rate as "high risk" in the industry, this example shows that: O A project with high project risk may not have high beta or systematic risk. O A project with high project risk may have high beta or systematic risk. Hector's company can expect to earn return. Classifying the 60% failure rate as "hi 21,000.00% ndustry, this example shows that: A project with high project 15,937.50% ve high beta or systematic risk. 25,875.00% igh beta or systematic risk. 340.00% A project with high project Hector 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 Hector's firm is likely to It is important for diversified firms as well as small business owners like Hector 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 coefficient of variation an appropriate measure of project risk? When the two projects differ in size When the two projects are the same in size 1. Project risk versus portfolio risk 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 risk in a project that does not take into account the impact of diversification within a company is referred to as the project's risk. total Consider the following case: beta Hector owns a smart phone application development company. The cost involved in developing a new application is around $15,000. Given that there are thousands of mobile phone applications in the market, the probability of an application becoming successful in the market is 40%. However, if it is successful, each app can generate profits up to $150,000. Hector's company develops more than 16 applications a year and records the entire development cost of the application as a loss if any app is not successful. Hector's company can expect to earn return Classifying the 60% failure rate as "high risk" in the industry, this example shows that: O A project with high project risk may not have high beta or systematic risk. O A project with high project risk may have high beta or systematic risk. Hector's company can expect to earn return. Classifying the 60% failure rate as "hi 21,000.00% ndustry, this example shows that: A project with high project 15,937.50% ve high beta or systematic risk. 25,875.00% igh beta or systematic risk. 340.00% A project with high project Hector 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 Hector's firm is likely to It is important for diversified firms as well as small business owners like Hector 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 coefficient of variation an appropriate measure of project risk? When the two projects differ in size When the two projects are the same in size
