Peregrine Foundations of Business Finance Practice Test 2025 - Free Business Finance Practice Questions and Study Guide

Question: 1 / 400

What does stand-alone risk refer to in project assessment?

The overall market risk of all assets

The risk associated with an investment as if it were the only asset a firm held

Stand-alone risk refers to the risk associated with a specific investment or project when evaluated independently of any other assets or investments in a firm's portfolio. This concept is important in project assessment because it allows analysts to focus on the unique risks related to a particular project, disregarding the effects of diversification that might mitigate those risks when considering the entire firm's asset base.

When determining stand-alone risk, analysts look at factors such as the project's expected cash flows, their variability, and the specific uncertainties inherent in the project. This approach helps in making informed investment decisions by highlighting the financial volatility and potential outcomes of an investment on its own. Thus, understanding stand-alone risk is crucial for decision-makers who need to ascertain the attractiveness of a project prior to integrating it into their broader investment strategy.

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The variance of returns over time

The risk of losing an investment due to external factors

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