Taussig Technologies Is Considering Two Potential Projects,X and Y ?
Which of the Following Statements Is CORRECT?
A) Project

question 80

Multiple Choice

Taussig Technologies is considering two potential projects,X and Y.In assessing the projects' risks,the company estimated the beta of each project versus both the company's other assets and the stock market,and it also conducted thorough scenario and simulation analyses.This research produced the following data: $\begin{array}{lll}&\text { Project } \mathrm{X}&\text { Project } \mathrm{Y}\\\text { Expected NPV } & \$ 350,000 & \$ 350,000 \\\text { Standard deviation (oNPV) } & \$ 100,000 & \$ 150,000 \\\text { Project beta (vs. market) } & 1.4 & 0.8\\\text { Correlation of the project cash flows }&\text { Cash flows are not correlated }&\text { Cash flows are highly correl ated }\\\text { with cash flows from currently }&\text { with the cash flows from }&\text { with the cash flows from }\\\text { existing projects. }&\text { existing projects. }&\text { existing projects. }\\\end{array}$
?
Which of the following statements is CORRECT?

• A) Project X has more stand-alone risk than Project Y.
• B) Project X has more corporate (or within-firm)risk than Project Y.
• C) Project X has more market risk than Project Y.
• D) Project X has the same level of corporate risk as Project Y.
• E) Project X has the same market risk as Project Y since its cash flows are not correlated with the cash flows of existing projects.

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Definitions:

Adverse Selection

A situation in which one party in a transaction has more or better information than the other party, typically resulting in an unfavorable selection process.

Peaches

A type of fruit with a distinctive sweet taste, fuzzy skin, and a pit or stone in the center.

Lemons

A term that describes a product of significantly lower quality than what has been claimed, especially in the context of used vehicles.

Moral Hazard

Arises when one party to a contract changes behavior in response to that contract and thus passes on the costs of that behavior change to the other party.