Corporate Finance - Types of Risk

Like anything, projects do have risks. There are three types of project risks associated with capital budgeting: 

1. Stand-Alone Risk
This risk assumes the project a company intends to pursue is a single asset that is separate from the company's other assets. It is measured by the variability of the single project alone. Stand-alone risk does not take into account how the risk of a single asset will affect the overall corporate risk.

2. Corporate Risk
This risk assumes the project a company intends to pursue is not a single asset but incorporated with a company's other assets. As such, the risk of a project could be diversified away by the company's other assets. It is measured by the potential impact a project may have on the company's earnings.

3. Market Risk
This looks at the risk of a project through the eyes of the stockholder. It looks at the project not only from a company's perspective, but from the stockholder's overall portfolio. It is measured by the effect the project may have on the company's beta.

Risk-Analysis Techniques


Related Articles
  1. Professionals

    What Exactly Do Project Managers Do?

    While supervision is one important part of the job, a lot more goes into project management than just watching everyone work.
  2. Executive Compensation

    Project Manager: Job Description & Average Salary

    Discover more about the specific tasks that project managers are responsible for and the average salary that can be expected in such a position.
  3. Professionals

    Project Manager: Career Path & Qualifications

    Learn more about what project managers job, the qualifications necessary for the position and the most common careers for these professionals.
  4. Professionals

    Divisional And Project Costs of Capital

    Divisional and project costs of capital allow a firm to use a different cost of capital for company divisions and projects that have different levels of risk.
  5. Investing Basics

    Capital Budgeting: The Importance Of Capital Budgeting

    Capital budgeting is a step by step process that businesses use to determine the merits of an investment project. The decision of whether to accept or deny an investment project as part of a ...
  6. Professionals

    Capital Budgeting Basics

    CFA Level 1 - Capital Budgeting Basics. Briefly discusses capital budgeting and how it relates to project planning. Covers the classification of projects and importance of budgeting.
  7. Professionals

    Introduction To Project Analysis And Valuation

    Valuation analysis is used to evaluate the potential merits of an investment or to objectively assess the value of a business or asset.
  8. Professionals

    Risk Management Framework (RMF): An Overview

    A company must identify the type of risks it is taking, as well as measure, report on, and set systems in place to manage and limit, those risks.
  9. Professionals

    Capital Budgeting

    Capital budgeting is really important when making important business decisions.
  10. Investing

    What's a Hurdle Rate?

    Hurdle rate has two meanings. In the business world, a business typically makes a decision on a capital project based on the net present value approach. To determine the net present value, the ...
RELATED TERMS
  1. Standalone Risk

    The risk associated with a single operating unit of a company ...
  2. Standalone Profit

    The profit associated with the operation of a single project ...
  3. Project Finance

    Defined by the International Project Finance Association (IPFA) ...
  4. Initial Cash Flow

    The amount of money paid out or received at the start of a project ...
  5. Capital Project

    A long-term investment made in order to build upon, add or improve ...
  6. Completion Bond

    A financial contract that insures a given project will be completed ...
RELATED FAQS
  1. How do you use the profitability index rule when scoping out a project?

    Understand the parameters of the profitability index rule and how this rule is used in corporate capital allocation to determine ... Read Answer >>
  2. How do you calculate costs of capital when budgeting new projects?

    Discover how a company should estimate its costs of capital when budgeting for a new business project using the weighted ... Read Answer >>
  3. How do companies calculate the estimated duration of a new project?

    Learn about some of the common methods used by companies to estimate the duration of a new project, including those with ... Read Answer >>
  4. Why is a bank guarantee important in a long-term project contract?

    Understand what a bank guarantee is and learn why it is so important to the risk and safety of a long-term project contract Read Answer >>
  5. How do you use internal rate of return to calculate a capital budget?

    Learn about how the internal rate of return is used in the creation of a capital budget along with net present value and ... Read Answer >>
  6. How much debt is too much when calculating capital budgeting?

    Learn how companies determine how much debt is acceptable when funding a new project by using the net present value to estimate ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center