If a project’s stand-alone, corporate, and market risk are known to be highly correlated, how would this affect risk analysis? Explain.

If a project’s stand-alone, corporate, and market risk are known to be highly correlated, how would this affect risk analysis? Explain.

Category:
June 4, 2021
8 Views
0
0

If a project’s stand-alone, corporate, and market risk are known to be highly correlated, how would this affect risk analysis? Explain.

Answer and ExplanationSolution by a verified expert

Explanation

The risk of a project is dependent upon its stand-alone risk, which is the risk of uncertainty in the project's cash flows. But, if the stand-alone risk is correlated with the corporate and the market risk, then it can be said that the required return on equity is equal to the project's required return. Therefore, any change in the market conditions will directly affect the project's net present value (NPV).

Verified Answer

The project will directly get affected by the uncertainties if the stand-alone risk, market risk and the corporate risk are highly correlated. This is because the stand-alone risk affects the cash flows from a project; therefore, any uncertainty in the market, the cash flows will directly get affected.

Purchase this answer to view it.
Click the button to login/signup and buy full solution at 2 USD only.

The Best Research Paper Writing Service

Would you want to pay someone to write your paper professionally from scratch? 100% Original and 0% AI Content!.

🎓 Write my Essay
📚 Write my Persuasive Essay
📋 Humanize AI Content for Turnitin
💻 Write my Reflective Essay
📑 Write my Research Paper
📜 Write my Thesis Paper
📘 Write my Dissertation
📋 Write my Case Study
📝 Write my Online Exam
✒️ Write my Term Paper
Write my Paper