Magni, Carlo Alberto (2005): THEORETICAL FLAWS IN THE USE OF THE CAPM FOR INVESTMENT DECISIONS.
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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|
|Keywords:||Capital budgeting, CAPM, investment decisions, nonadditivity, framing effects|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
G - Financial Economics > G3 - Corporate Finance and Governance > G30 - General
|Depositing User:||Carlo Alberto Magni|
|Date Deposited:||17. Dec 2007 21:03|
|Last Modified:||12. Feb 2013 18:05|
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