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Unformatted text preview: e of the risk of
the project. But this is the project's risk in isolation from the company's other projects. This is the risk of
the project ignoring the effects of diversification and is referred to as the project's total risk, or standalone risk.
Since most companies have other assets, the stand-alone risk of the project under consideration may not
be the relevant risk for analyzing the project. A company is a portfolio of assets and the returns of these
different assets do not necessarily move together; that is, they are not perfectly positively correlated with
one another. We are therefore not concerned about the stand-alone risk of a project, but rather how the
addition of the project to the company's portfolio of assets changes the risk of the company's portfolio.
Now let's take it a step further. The shares of many companies may be owned by investors who
themselves hold diversified portfolios. These investors are concerned about how the company's
investments affect the risk of t...
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- Spring '07