The market risk of a project is measured by:
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A. B. C. D.A
Remember that it is the systematic risk that you must worry about.
The correct answer is A. the project's impact on the systematic risk of the firm's stock.
Market risk refers to the risk that is inherent in the overall market and cannot be diversified away. It is a broad measure of risk that affects all securities in the market. When evaluating the market risk of a project, we are concerned with how the project affects the systematic risk of the firm's stock.
Systematic risk, also known as non-diversifiable risk or market risk, is the risk that is associated with the entire market or a specific market segment. It is not specific to an individual stock or project and cannot be eliminated through diversification. It includes factors such as interest rate changes, economic conditions, political events, and market volatility.
The market risk of a project is measured by assessing its impact on the systematic risk of the firm's stock. If a project increases the systematic risk of the firm's stock, it means that the project introduces additional risk factors that are correlated with the overall market. This can occur, for example, if the project is highly sensitive to changes in interest rates or if it is exposed to economic or regulatory risks.
On the other hand, if a project does not affect the systematic risk of the firm's stock, it implies that the project's returns are independent of the overall market movements. In this case, the project's risk would be considered idiosyncratic or unsystematic risk, which can be diversified away by holding a well-diversified portfolio.
Therefore, the correct answer is A. the project's impact on the systematic risk of the firm's stock, as it captures the measure of market risk associated with the project and its influence on the broader market factors.