7. Within-firm risk and beta risk Aa Aa Understanding risks that affect projects

Question

7. Within-firm risk and beta risk Aa Aa Understanding risks that affect projects and the impact of risk consideration Garcia Real Estate is involved in commercial real estate ventures throughout the United States. Some of these ventures are much riskier than other ventures because of market conditions in different regions of the country. If Garcia does not risk-adjust its discount rate for specific ventures properly, which of the following is likely to occur over time? Check all that apply. The firm will make poor capital budgeting decisions that could jeopardize the long-run viability of the company. The firm will reject too many relatively safe projects. The firm will become less risky. Generally, a positive correlation exists between a project's returns and the returns on the firm's other assets. If this correlation is ,stand-alone risk will be a good proxy for within-firm risk.

Explanation / Answer

7.a. Option (A) The firm will make poor capital budgeting decisions that could jeopardize the long-run viability of the company.

b. Project A has more market risk than Project B. Option (D).becaus of more market beta & standard deviation from the expected return.

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