THEORETICAL FLAWS IN THE USE OF THE CAPM FOR INVESTMENT DECISIONS Report as inadecuate




THEORETICAL FLAWS IN THE USE OF THE CAPM FOR INVESTMENT DECISIONS - Download this document for free, or read online. Document in PDF available to download.

Abstract

This paper uses counterexamples and simple formalization to show that the standard CAPM-based Net Present Value may not be used for investment valuations. The reason is that the standard CAPM-based capital budgeting criterion implies a notion of value which does not comply with the principle of additivity. Framing effects arise in decisions so that different descriptions of the same problem lead to different choices. As a result, the CAPM-based NPV as a tool for valuing projects and making investment decisions is theoretically unsound, even if the CAPM assumptions are met.



Item Type: MPRA Paper -

Original Title: THEORETICAL FLAWS IN THE USE OF THE CAPM FOR INVESTMENT DECISIONS-

Language: English-

Keywords: Capital budgeting, CAPM, investment decisions, nonadditivity, framing effects-

Subjects: G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest RatesG - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment DecisionsG - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting ; Fixed Investment and Inventory Studies ; CapacityG - Financial Economics > G3 - Corporate Finance and Governance > G30 - General-





Author: Magni, Carlo Alberto

Source: https://mpra.ub.uni-muenchen.de/6330/







Related documents