Correct or incorrect application of CAPM? Correct or incorrect decisions with CAPM?

Carlo Alberto Magni

European Journal of Operational Research, 2009, vol. 192, issue 2, 549-560

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 [Magni, C.A., 2002. Investment decisions in the theory of finance: Some antinomies and inconsistencies. European Journal of Operational Research 137, 206-217; Magni, C.A., 2007a. Project valuation and investment decisions: CAPM versus arbitrage. Applied Financial Economics Letters 3 (2), 137-140] criticism of the NPV criterion refers to the disequilibrium NPV, and De Reyck's [De Reyck, B., 2005. On investment decisions in the theory of finance: Some antinomies and inconsistencies. European of Operational Research 161, 499-504] 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 (search for similar items in EconPapers)
Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0377-2217(07)00959-9
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Correct or incorrect application of CAPM? Correct or incorrect decisions with CAPM? (2007)
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:eee:ejores:v:192:y:2009:i:2:p:549-560

Access Statistics for this article

European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

More articles in European Journal of Operational Research from Elsevier
Bibliographic data for series maintained by Catherine Liu ().