Consider a firm to be a portfolio of several projects. The contribution of a projects risk to the firms 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 associated with the uncertainty of a projects future cash flows is called risk.

Consider the following case:

Caesar 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 24%. However, if it is successful, each app can generate profits up to $150,000. Caesars 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.

Caesars company can expect to earn return.

Classifying the 76% failure rate as high risk in the industry, this example shows that:

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.

Caesar is thinking about expanding into the website development business. The website development business has a lower beta than the mobile application development business and is not positively correlated to the mobile application development business. With this expansion, the beta of Caesars firm is likely to .

It is important for diversified firms as well as small business owners like Caesar 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