A Dozen Consistent CAPM-Related Valuation Models - So Why Use the Incorrect One?

Steinar Ekern

No 2006/6, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

Abstract: Betas computed from returns based on investment cost rather than on market value, may give systematically inappropriate discount rates and numerically incorrect present values for nonzero NPVs and "mispriced" assets. The paper provides a self contained collection of a "baker's dozen" consistent CAPM-related methods, that all give correct valuation results. The models include approaches based on certainty equivalents, equilibrium and disequilibrium required discount rates, simplified discounting rules for particular cash flow formulations, as well as required adaptations to make valuations from more advanced valuation methods consistent with correct CAPM procedures. Additional issues and relations related to different betas are also discussed and partly extended. Derivations of the valuation methods are shown in an appendix. A running base case numerical example illustrates the various procedures.

Keywords: CAPM consistency; disequilibrium valuation; cost based betas; risk-adjusted discount rates; simple rules; mispricing; Jensen's alpha (search for similar items in EconPapers)
JEL-codes: G11 G12 G31 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2006-05-30, Revised 2007-04-25
New Economics Papers: this item is included in nep-fin and nep-fmk
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://hdl.handle.net/11250/163610 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://hdl.handle.net/11250/163610 [302 Found]--> https://www.unit.no/brage-denne-lenken-er-ikke-lenger-gyldig [301 Moved Permanently]--> https://sikt.no/brage-denne-lenken-er-ikke-lenger-gyldig)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hhs:nhhfms:2006_006

Access Statistics for this paper

More papers in Discussion Papers from Norwegian School of Economics, Department of Business and Management Science NHH, Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway. Contact information at EDIRC.
Bibliographic data for series maintained by Stein Fossen ().