Which statements are true?

I. In the pure play method a firm averages the betas of companies that are in the same line of business as the project being evaluated.
II. The pure play method can only be used after a project has begun operation.
III. The pure play method estimates the beta of a project by using as a proxy the beta of a company that does nothing but the activity dictated by the project in question.

Correct Answer: I and III

While a project's risk is incorporated into the risk of the company as a whole, its individual risk profile could be remarkably different from the risk profile of the company as a whole. The only time that a company's beta may be used as a proxy for a project's beta is when the project has a risk profile that is largely similar to that of the corporation as a whole.