The Development of a Mean-Semivariance Approach to Capital Budgeting

R. Burr Porter, Roger P. Bey and David C. Lewis

Journal of Financial and Quantitative Analysis, 1975, vol. 10, issue 4, 639-649

Abstract: Recent trends in capital budgeting have been toward more complex decision rules with increasingly sophisticated treatments of risk. Although they have the virtue of simplicity, undiscounted methods such as the payback do not account for the time value of money. Net present value and internal rate of return consider the time value of money but many questions remain about the proper discount rate, the reinvestment assumption, and the statistical interrelations among projects. The latest approaches, referred to as portfolio models, are substantially more complicated but are the only methods that consider the statistical interrelations among the various assets. The most popular portfolio approach has been the mean-variance (E-V) model developed by Sharpe [10] and Lintner [5].

Date: 1975
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