Capital-Budgeting Decisions Involving Combinations of Risky Investments

James Van Horne
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James Van Horne: Graduate School of Business, Stanford University

Management Science, 1966, vol. 13, issue 2, B84-B92

Abstract: In this paper, a method is proposed for evaluating combinations of investments when the cash flows are not known with certainty. Various probability concepts are employed; and combinations are evaluated according to their incremental contribution of expected net-present value and variance to the firm as a whole. It is shown that existing investment projects must be considered if the total risk of a particular combination of investment proposals is to be evaluated realistically. Through diversification of investments, a firm is able to obtain the most desirable combination of expected net-present value and risk.

Date: 1966
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