Investment Options, Assets in Place, and the Risk of Stocks

Financial Management, Vol. 20, No. 3, pp. 21-33, Autumn, 1991

Posted: 15 Dec 2009

See all articles by Kee H. Chung

Kee H. Chung

State University of New York at Buffalo - School of Management

Charlie Charoenwong

Nanyang Technological University (NTU)

Date Written: 1993

Abstract

This paper employs contingent claims analysis to decompose the firm's systematic risk into the risk as- sociated with its assets in place and the risk arising from future growth opportunities. 5 Contingent claims analysis is well-suited to such decomposition, since a growth opportunity can be regarded as a call option on a real asset where the option's exercise price is the fu- ture investment needed to acquire the asset. Whether the option has any value at expiration depends on the asset's future value. In essence, this study predicts that the greater the portion of a stock's market value ac- counted for by the firm's growth opportunities, the higher the stock risk. Overall, our empirical results strongly support this hypothesis.

JEL Classification: G1

Suggested Citation

Chung, Kee H. and Charoenwong, Charlie, Investment Options, Assets in Place, and the Risk of Stocks (1993). Financial Management, Vol. 20, No. 3, pp. 21-33, Autumn, 1991, Available at SSRN: https://ssrn.com/abstract=1522128

Kee H. Chung (Contact Author)

State University of New York at Buffalo - School of Management ( email )

Buffalo, NY 14260
United States
716-645-3262 (Phone)
716-645-3823 (Fax)

HOME PAGE: http://mgt.buffalo.edu/faculty/academic-departments/finance/faculty/kee-chung.html

Charlie Charoenwong

Nanyang Technological University (NTU) ( email )

Nanyang Business School, BF Division
S3-01c-104
Singapore, 639798
Singapore
+65 6790 4799 (Phone)
+65 6791 3697 (Fax)

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