6. Within-firm risk and beta risk

Understanding risks that affect projects and the impact of risk consideration

WSP Inc. is involved in a wide range of unrelated projects. The company will pursue any project that it thinks will create value for its stockholders. Consequently, the risk level of the companys projects tends to vary a great deal from project to project.

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

The firm will reject too many relatively safe projects.

The firm will make poor capital budgeting decisions that could jeopardize the long-run viability of the company.

The firm will become less risky.

Generally, a positive correlation exists between a projects returns and the returns on the firms other assets. If this correlation is , stand-alone risk will be a good proxy for within-firm risk.

Consider the case of another company. Chrome Printing is evaluating two mutually exclusive projects. They both require a $5 million investment today and have expected NPVs of $1,000,000. 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 projects expected NPVs	$400,000	$200,000
Project beta	0.9	1.1
Correlation coefficient of project cash flows (relative to the firms existing projects)	0.7	0.9

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

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

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

Project A has more corporate risk than Project B.

Project B has more market risk than Project A.