46. Currently, DEF Ltd. Has a beta of 1 and its sales and profits are positively

Question

46. Currently, DEF Ltd. Has a beta of 1 and its sales and profits are positively correlated with the overall economy. The company estimates that a proposed new project would have a higher standard deviation and coefficient of variation than one of the company’s average projects. Also, the new project’s sales would be counter-cyclical in the sense that they would be high when the overall economy is down and low when the overall economy is strong. On the basis of this information, which of the following is true?
____
A) The proposed new project would have more stand-alone risk than the firm’s typical project
B) The proposed new project would increase the firm’s corporate risk
C) The proposed new project would not affect the firm’s risk at all
D) The proposed new project would have less stand-alone risk than the firm’s typical project

Explanation / Answer

A) The proposed new project would have more stand-alone risk than the firm

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