Aa Aa E. 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 associated with the uncertainty of a project's future cash flows is called risk Consider the following case: Sergei owns a smart phone application development company. The cost involved in developing a new application is around $20,000. Considering that there are thousands of mobile phone applications in the market, the probability of an application becoming successful in the market is 16%. However, if it is successful, it can generate profits up to $200,000. Sergei's company develops more than 10 applications a year and accounts for the entire development cost as a loss if any one application is not successful. Sergei's company can expect to earn return Considering the 84% failure rate as high risk in the industry, this example shows that: O A project with high project risk may have high beta or systematic risk O A project with high project risk may not have high beta or systematic risk Sergei 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 Sergei's firm is likely to