When owners demand compensation for risk they are

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Unformatted text preview: heir own personal portfolios. When owners demand compensation for risk, they are requiring compensation for market risk, the risk they can't get rid of by diversifying. Recognizing this, a company considering taking on a new project should be concerned with how it changes the market risk of a company. Therefore, if the company's owners hold diversified investments, it is the project's market risk that is relevant to the company's decision making. Even though we generally believe that it's the project's market risk that is important to analyze, standalong risk should not be ignored. If we are making decisions for a small, closely-held company, whose owners do not hold well-diversified portfolios, the stand-alone risk gives us a good idea of the project's risk. And many small businesses fit into this category. And even if we are making investment decisions for large corporations that have many products and whose owners are well-diversified, the analysis of stand-alone risk is useful. Stand-alone risk is often closely related to market risk: in many cases, projects with higher stand-alone risk may...
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This note was uploaded on 02/07/2014 for the course MIS 304 taught by Professor Mejias during the Spring '07 term at University of Arizona- Tucson.

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