Correct or Incorrect Application of CAPM? Correct or Incorrect Decisions With CAPM?

European Journal of Operational Research, 2009, 192(2) (January), 549-560

28 Pages Posted: 2 Nov 2007 Last revised: 14 Aug 2009

See all articles by Carlo Alberto Magni

Carlo Alberto Magni

Università degli studi di Modena e Reggio Emilia (UNIMORE) - School of Doctorate E4E (Engineering for Economics-Economics for Engineering)

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 (2002, 2007a, forthcoming) criticism of the NPV criterion refers to the disequilibrium NPV, and De Reyck's (2005) 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, investment analysis, Net Present Value, Capital Asset Pricing Model, disequilibrium, decision, valuation, nonadditivity, arbitrage

JEL Classification: G11, G12, G31, D81

Suggested Citation

Magni, Carlo Alberto, Correct or Incorrect Application of CAPM? Correct or Incorrect Decisions With CAPM?. European Journal of Operational Research, 2009, 192(2) (January), 549-560, Available at SSRN: https://ssrn.com/abstract=1025998

Carlo Alberto Magni (Contact Author)

Università degli studi di Modena e Reggio Emilia (UNIMORE) - School of Doctorate E4E (Engineering for Economics-Economics for Engineering) ( email )

Italy

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