The statement reflects a key concept in finance regarding the risk assessment of corporate projects. Standalone risk refers to the risk associated with a specific project when evaluated independently, without considering other projects or the overall portfolio of the company. This type of risk may be high due to factors like market volatility, operational challenges, or project-specific uncertainties.
However, when a project is placed within the broader context of the company’s entire portfolio, its impact on stockholders’ risk can differ significantly. Corporations usually have multiple projects, and some may be negatively correlated with one another. This means that while one project might be facing high standalone risks, other projects might be performing well and can help to mitigate the overall risk faced by stockholders.
In essence, the overall risk to stockholders is determined by the combination of all projects and their interrelations, rather than by evaluating each project in isolation. A high-risk project could be acceptable if it enhances the diversification of risk across different segments of the company or if it has the potential for high returns that can outweigh its inherent risks.