Title of article :
Correct or incorrect application of CAPM? Correct or incorrect decisions with CAPM?
Author/Authors :
Carlo Alberto Magni، نويسنده ,
Issue Information :
روزنامه با شماره پیاپی سال 2009
Pages :
12
From page :
549
To page :
560
Abstract :
This paper focuses on inconsistencies arising from the use of NPV and CAPM for capital budgeting. It shows that: (i) CAPM capital budgeting decision-making based on disequilibrium NPV is deductively inferred by the capital asset pricing model, (ii) the use of the disequilibrium NPV is widespread in finance both as a decision rule and as a valuation tool, (iii) the disequilibrium NPV does not guarantee additivity nor consistency with arbitrage pricing, so that it is unreliable for valuation, (iv) Magni’s [Magni, C.A., 2002. Investment decisions in the theory of finance: Some antinomies and inconsistencies. European Journal of Operational Research 137, 206–217; Magni, C.A., 2007a. Project valuation and investment decisions: CAPM versus arbitrage. Applied Financial Economics Letters 3 (2), 137–140] criticism of the NPV criterion refers to the disequilibrium NPV, and De Reyck’s [De Reyck, B., 2005. On investment decisions in the theory of finance: Some antinomies and inconsistencies. European of Operational Research 161, 499–504] project valuation method, on the basis of which Magni’s criticism to NPV is objected, leaves decision makers open to arbitrage losses and incorrect decisions.
Keywords :
Finance , Net present value , Investment analysis , Nonadditivity , Decision , Valuation , Arbitrage , Disequilibrium , Capital asset pricing model
Journal title :
European Journal of Operational Research
Serial Year :
2009
Journal title :
European Journal of Operational Research
Record number :
1313352
Link To Document :
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