Question

Taussig Technologies is considering two potential projects, X and Y. In assessing the projects' risks, the company estimated the beta of each project versus both the company's other assets and the stock market, and it also conducted thorough scenario and simulation analyses. This research produced the following data: Expected NPV - Standard deviation (sNPV)Project X : $350,000 - $100,000Project Y : $350,000 - $150,000 Project beta (vs. market) : 1.4 - 0.8 Correlation of the project cash flows with cash flows from currently existing projects. Cash flows are not correlated with the cash flows from existing projects. Cash flows are highly correlated with the cash flows from existing projects.Which of the following statements is CORRECT?a. Project X has more stand-alone risk than Project Y. b. Project X has more corporate (or within-firm) risk than Project Y. c. Project X has more market risk than Project Y. d. Project X has the same level of corporate risk as Project Y. e. Project X has less market risk than Project Y.

Answer 1

Answer:

C) Project X has more market risk than Project Y.

Explanation:

Market risk refers to risks associated with the performance of the whole market, e.g. changes in interest rates, changes in commodity prices. Taussig Technologies cannot eliminate market risks since they depend on external factors.  

Project X has a higher beta (vs. market) than project Y, therefore it has more market risk.