$6.$ Within$-$firm risk and beta risk

Understanding risks that affect projects and the impact of risk consideration

Garcia Real Estate is involved in commercial real estate ventures throughout the United States. Some of these ventures are much riskier than other ventures because of market conditions in different regions of the country.

If Garcia does not risk$-$adjust its discount rate for specific ventures properly, which of the following is likely to occur over time? Check all that apply.

The firm will accept too many relatively risky projects.

The firm will accept too many relatively safe projects.

The firm will become less valuable.

When a project involves an entirely new product line, the firm may be able to obtain betas from to calculate a weighted average cost of capital $($WACC$)$ for its new product line.

Consider the case of another company. Turnkey Printing is evaluating two mutually exclusive projects. They both require a $$3$ million investment today and have expected NPVs of $$600,000.$ Management conducted a full risk analysis of these two projects, and the results are shown below.

Risk Measure

Project A

Project B

Standard deviation of project$$s expected NPVs $$240,000$ $$360,000$

Project beta $0\mathrm{.}91\mathrm{.}1$

Correlation coefficient of project cash flows $($relative to the firm$$s existing projects$)0\mathrm{.}70\mathrm{.}5$

Which of the following statements about these projects$$ risk is correct? Check all that apply.

Project B has more corporate risk than Project A$.$

Project B has more stand$-$alone risk than Project A$.$

Project B has more market risk than Project A$.$

Project A has more market risk than Project B$.$