1. Project risk versus portfolio risk Consider a firm to be a portfolio of sever

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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 partiaular project itself. risk. The risk associated with the uncertainty of a project's future cash flows is called portfolia project Consider the following case: Li owns a smart phone application development company. The cost involved in developing a new application is around $10,000. Given that there are thousands of mobile phone applications in the market, the probability of an application becoming sucessful in the market is 16%. However, if it is successful, each app can generate profits up to $100,000. Li's company develops more than 10 applications a year and records the entire development cost of the application as a loss if any app is not successful. Li's company can expect to earn return. Classifying 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. Li 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 Li's firm is likely to it is important for diversifiled firms as well as small business owners like Li 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 oefficient of variation an appropriate measure of project risk? O When the two projects are the same in size when the two projects differ in size 0,187 Grade It Now Continue without savia

Explanation / Answer

Question - 1 ....................Project risk

Question - 2 ................. 76000 return (or ) positive return

win = 100000 * 10 = 1000000 but prob is 0.16 ........so it will be 160000

loss = 10000 * 10 = 100000 * 0.84 = 84000

return = 160000 - 84000 = 76000

Question - 3 .................Option - 1 ......Project with high project risk, and high beta

Question - 4 .................Decrease

Since they are not positively correlated and lower risk in expansion.

Queston - 5 ...............When two projects differ in size.

All answer will be 100% correct........... All the best.

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