Currently, Zapata Products has a beta of 1.0, and its sales and profits are positively correlated with the overall economy. The company estimates that a proposed new project would have a higher standard deviation and coefficient of variation than an average company project. Also, the new project's sales would be countercyclical in the sense that they would be high when the overall economy is down and low when the overall economy is strong. On the basis of this information, which of the following statements is CORRECT? O a. The proposed new project would have more stand-alone risk than the firm's typical project. O b. The proposed new project would increase the firm's corporate risk. O c. The proposed new project would increase the firm's market risk. O d. The proposed new project would not affect the firm's risk at all. O e. The proposed new project would have less stand-alone risk than the firm's typical project.
Currently, Zapata Products has a beta of 1.0, and its sales and profits are positively correlated with the overall economy. The company estimates that a proposed new project would have a higher standard deviation and coefficient of variation than an average company project. Also, the new project's sales would be countercyclical in the sense that they would be high when the overall economy is down and low when the overall economy is strong. On the basis of this information, which of the following statements is CORRECT? O a. The proposed new project would have more stand-alone risk than the firm's typical project. O b. The proposed new project would increase the firm's corporate risk. O c. The proposed new project would increase the firm's market risk. O d. The proposed new project would not affect the firm's risk at all. O e. The proposed new project would have less stand-alone risk than the firm's typical project.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:QUESTION 33
Currently, Zapata Products has a beta of 1.0, and its sales and profits are positively correlated with the overall economy. The company estimates that a proposed new project would
have a higher standard deviation and coefficient of variation than an average company project. Also, the new project's sales would be countercyclical in the sense that they would be
high when the overall economy is down and low when the overall economy is strong. On the basis of this information, which of the following statements is CORRECT?
O a. The proposed new project would have more stand-alone risk than the firm's typical project.
O b. The proposed new project would increase the firm's corporate risk.
O c. The proposed new project would increase the firm's market risk.
d. The proposed new project would not affect the firm's risk at all.
O e. The proposed new project would have less stand-alone risk than the firm's typical project.
Expert Solution
Step 1: Beta
The beta is said to be the measure of race associated with assessing the systematic or market is because beta considered the particular type of investment with the market indices.
The standard deviations provide how much the investment return has deviated from the average.
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