Distinguish among beta (or market) risk, within-firm (or corporate) risk, and stand-alone risk for a project being considered for inclusion in the capital budget

kvasilw0 2022-08-12 Answered
Distinguish among beta (or market) risk, within-firm (or corporate) risk, and stand-alone risk for a project being considered for inclusion in the capital budget
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Tristian Clayton
Answered 2022-08-13 Author has 12 answers
Beta or market risk is risk of the project or asset in relation to the performance of the market as perceived by an investor who holds a diversified portfolio. In other words, this risk is relevant to investors and not to the firm.
Within-firm or corporate risk is the risk of the project in relation to the nature of the company's own operations. In other words, this risk is the risk to the company itself, and not to the investors. This is measured by the impact on the uncertainty of the company's expected returns as a whole.
Stand-alone risk is the risk of a project assuming the project is the only project that the firm currently undertakes or the only asset or stock that the investor holds. This is measured by the variability of the project's returns. This risk is relevant both to the investors and the company undertaking the project
Result:
Beta or market risk is risk of the project or asset in relation to the performance of the market as perceived by an investor who holds a diversified portfolio.
Within-firm or corporate risk is the risk of the project in relation to the nature of the company's own operations as perceived by the company itself.
Stand-alone risk is the risk of a project assuming the project is the only project that the firm currently undertakes or the only asset or stock that the investor holds.
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