Arbitrage-Free Valuation of Investment Projects Using Risk-Adjusted Discount Rates
17 Pages Posted: 15 Jun 2004
Date Written: July 29, 2004
This short note discusses the link between the certainty equivalent approach of modern asset pricing theory and the cost of capital approach in DCF-models in a capital market model. Therefore we distinguish two notions of cost of capital: (a) risk-adjusted discount rates for a particular cash flow and (b) risk-adjusted returns of the project. In order to account for the flow of information both types are defined with respect to the valuation date.
Note: Downloadable document is in German.
Keywords: Risk neutral valuation, capital budgeting
JEL Classification: D81, G12, G31
Suggested Citation: Suggested Citation