How does the correlation between returns on a project and returns
How does the correlation between returns on a project and returns on the firm’s other assets affect the project’s risk?
The returns from other assets can affect the returns on projects that are dependent upon those assets for their success. A retailer, for example, might launch a project to add a new line of products. The new line would depend on existing retail traffic for its success. Therefore, if the existing retail business is adversely affected by outside factors, it could also adversely affect the project's returns.
Returns on other assets could affect the returns of a specific project if the project is dependent upon, and thus correlated with, those assets. If the returns on a project are negatively correlated with those of other assets, then the firm's overall returns may also be affected.