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Risk - adjusted rates of return for project appraisal

Avinash Dixit () and Amy Williamson

No 290, Policy Research Working Paper Series from The World Bank

Abstract: Incorporating risk assessment into public project appraisal makes sense when project risk is significantly correlated with uncertainty about national income. It is especially important in countries that specialize in particular agricultural or resource sectors. This report presents the following conclusions: (a) risk corrections can be substantial; (b) the intuition that risk is great for further investment in a crop or sector that constitutes a large part of a country's GNP is not invalid, but the effect may be offset by other forces in operation; (c) risk corrections can be negative because of a negative correlation between project return and GNP; (d) risk premia vary greatly across countries and sectors - so recognizing the risk correction needed for each project on its own merits makes more sense than including a common general risk premium in the rate of return required for all lending; (e) risk corrections are small for many sectors and countries - so efforts can be concentrated on the other categories, where the proposed treatment of risk makes a big difference; (f) risk affects investment projects in many different, subtle ways; and (g) resource requirements for this are not great.

Keywords: Environmental Economics&Policies; Health Economics&Finance; Banks&Banking Reform; Statistical&Mathematical Sciences; Crops&Crop Management Systems (search for similar items in EconPapers)
Date: 1989-11-30
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