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John is considering a new project that he deems profitable to his employer, a logistics company based in San Francisco. The project is twice as risky as the market. John is not sure if the project risk would be acceptable, given the overall enterprise risk management. He discusses the matter with Sally, his colleague in the same department. Sally suggests four different alternatives to John, as she is not sure what needs to be done. If the market return is 10%, the risk-free rate is 3%, and the company’s overall coefficient of variation is 10% (for 1% return the company undertakes 0.1% risk), which of the following four alternatives would be John’s best option? If the project’s overall risk is: A. higher than 1.7%, it should be accepted. B. 2.0% or less, it should be accepted. C. 1.7% or less, it should be accepted. D. 1.2%, it should be rejected. |