Theoretical Flaws In The Use Of The Capm For Investment Decisions
AbstractThis 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.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 6330.
Date of creation: Dec 2005
Date of revision: Nov 2007
Capital budgeting; CAPM; investment decisions; nonadditivity; framing effects;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-01-05 (All new papers)
- NEP-CFN-2008-01-05 (Corporate Finance)
- NEP-PPM-2008-01-05 (Project, Program & Portfolio Management)
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