Evaluating some financial uncertainties of tree improvement using the capital asset pricing model and dominance analysis

1989 ◽  
Vol 19 (11) ◽  
pp. 1380-1388 ◽  
Author(s):  
Thomas A. Thomson
Keyword(s):  
Capital Budgeting ◽  
Tree Improvement ◽  
Site Quality ◽  
Capital Asset Pricing ◽  
Financial Risks ◽  
Improvement Program ◽  
Rates Of Return ◽  
Asset Pricing Model ◽  
Forestry Investments ◽  
Uncertainty Level

Although uncertainty considerations are of prime importance in capital budgeting, forestry investments are often evaluated without comparing their uncertainty level with their rates of return. This paper examines some financial uncertainties of a west coast Douglas-fir tree improvement program. Biophysical uncertainties such as amount of genetic gain or uncertainty of site quality are determined by apriori assumption to be nonmarket; thus, use of expected value adjusts for these risks. The market uncertainties of tree improvement are found to be reasonable, vis-à-vis other investments as sensitivity analysis shows that the financial risks were small, or the measured β was low. This paper concludes that the tree improvement investment is worthwhile, considering its risk as well as return.

scholarly journals Measuring Risk Structure Using the Capital Asset Pricing Model

2015 ◽  
Vol 63 (1) ◽  
pp. 227-233 ◽  
Author(s):  
Zdeněk Konečný ◽  
Marek Zinecker
Keyword(s):  
Asset Pricing ◽  
Cash Flow ◽  
Operational Risk ◽  
Capital Asset Pricing Model ◽  
Capital Asset Pricing ◽  
Financial Risks ◽  
Pricing Model ◽  
Capital Asset ◽  
Data Set ◽  
Asset Pricing Model

This article is aimed at proposing of an inovative method for calculating the shares of operational and financial risks. This methodological tool will support managers while monitoring the risk structure. The method is based on the capital asset pricing model (CAPM) for calculation of equity cost, namely on determination of the beta coefficient, which is the only variable, that is dependent on entrepreneurial risk. There are combined both alternative approaches for calculation betas, which means, that there are accounting data used and there is distinguished unlevered beta and levered beta. The novelty of the proposed method is based on including of quantities for measuring operational and financial risks in beta calculation. The volatility of cash flow, as a quantity for measuring of operational risk, is included in the unlevered beta. Return on equity based on the cash flow and the indebtedness are variables used in calculation of the levered beta. This modification makes it possible to calculate the share of operational risk as the proportion of the unlevered/levered beta and the share of financial risk, which is the remainder of levered beta. The modified method is applied on companies from two sectors of the Czech economy. In the data set there are companies from one cyclical sector and from one neutral sector to find out potential differences in the risk structure. The findings show, that in both sectors the share of operational risk is over 50%, however, in the neutral sector is this more dominant.

Paginas Amarelas

2017 ◽  
pp. 1-26
Author(s):  
Robert F. Bruner ◽  
Mario Wanderley
Keyword(s):  
Risk Premium ◽  
Cash Flows ◽  
Capital Asset Pricing ◽  
Pricing Model ◽  
Capital Asset ◽  
Rates Of Return ◽  
Asset Pricing Model ◽  
Telephone Directory ◽  
Rate Of Returns ◽  
Student Discussion

This case serves as a foundation for student discussion of the estimation of required rates of return (ROR) on investments in emerging markets. An associate in J.P. Morgan's Latin America M&A department (mergers and acquisitions) is assigned the task of valuing the telephone directory operations (“paginas amarelas” means “yellow pages”) of a large Brazilian conglomerate. All cash flows have been converted to U.S. dollars, and present values computed for various discount rates. The remaining step is to determine the appropriate target rate of returns for dollar flows originating in Argentina, Brazil, and Chile. The capital asset pricing model (CAPM) is used along with a political risk premium and country beta. The necessary figure work is comparatively light, leaving the student time to reflect on the need for various adjustments in estimating crossborder rates of return.

scholarly journals Jump Volatility Estimates of High Frequency Data and Analysis Based on HHT

2015 ◽  
Vol 7 (11) ◽  
pp. 242
Author(s):  
Jiangrui Chen ◽  
Lianqian Yin ◽  
Sizhe Hou ◽  
Wei Zhang ◽  
Xiaojie Liu ◽  
...  
Keyword(s):  
Financial Markets ◽  
Capital Asset Pricing ◽  
Financial Risks ◽  
Analysis Model ◽  
Hilbert Huang Transform ◽  
Asset Pricing Model ◽  
Research Findings ◽  
Volatility Analysis ◽  
Trend Functions ◽  
Financial Market Risk

<p>As the global financial market risk increases, countries stress more onthe management and prevention of financial risks. These financial risks come from the volatility of the market, and thus we can build more comprehensive understanding of financial markets by analyzing the composition and the law of the financial volatility in different frequency. Based on Hilbert Huang Transform, the realized volatility analysis model is establishedto decompose the volatility into various signal in dissimilar frequency. First of all, the realized leap volatility is obtained through the previous research findings and Capital Asset Pricing Model. Then, considering thenonlinearity and instability of the volatility, we use the Hilbert Huang Transform to decompose the volatility and obtain IMFs in different frequencies and trend functions.</p>

How an idiosyncratic (zero-beta) risk can greatly increase the firm’s cost of capital

2021 ◽  
pp. 031289622110595
Author(s):  
Andrew Grant ◽  
David Johnstone ◽  
Oh Kang Kwon
Keyword(s):  
Cost Of Capital ◽  
Capital Budgeting ◽  
Jel Classification ◽  
Capital Asset Pricing ◽  
Capital Asset ◽  
Asset Pricing Model ◽  
Roulette Wheel ◽  
Zero Correlation ◽  
Beta Risk ◽  
Financial Losses

The celebrated capital asset pricing model (‘CAPM’) brought numerous appealing insights and spawned a new theory of capital budgeting. One key intuition is that there is ‘no penalty for diversifiable risk’ – that is, any risky payoff that has zero-correlation with the wider economy, and hence zero-beta, is treated as ‘risk-free’. Does that mean that managers can bet the firm on a spin of the roulette wheel without attracting a higher CAPM discount rate? Our re-interpretation of CAPM reveals that potential financial losses which are conventionally regarded as firm-specific ‘unpriced’ risks can bring a large increase in the firm’s beta and CAPM cost of capital, despite having zero-beta and making only negligible difference at the aggregate market level. This mathematical result clashes with textbook expositions but is easily demonstrated and can be traced to authoritative but overlooked parts of the theoretical CAPM literature. JEL Classification: G11, G12

scholarly journals The Internal Rate of Return Model for Life Insurance Policies

2016 ◽  
Vol 8 (2) ◽  
pp. 70
Author(s):  
Mihir Dash
Keyword(s):  
Life Insurance ◽  
Rate Of Return ◽  
Capital Asset Pricing ◽  
Rates Of Return ◽  
Asset Pricing Model ◽  
Insurance Policies ◽  
Life Insurers ◽  
Different Types ◽  
Maturity Period ◽  
Basic Purpose

<p>Life insurance policies are no longer seen solely as a means of insuring life. Due to many new features introduced by life insurers, they are seen in the new light of serving savings and even investment purposes besides the basic purpose of insuring life. The present study discusses the rates of return given by different types of policies, and the effect of mortality on these rates of return across age, sum assured, and maturity period in each type of policy studied.</p><p>The findings indicate that different types of policies give different rates of return and that mortality does have an effect on the rates of return. Endowment plans have higher rate of return with mortality incorporated, while for unit-linked investment plans, the rate of return is higher when it is treated purely as an investment instrument. The study also revealed that the unadjusted and mortality-adjusted rates of return follow a linear relationship that is very similar to the capital asset pricing model. The study opens a further scope of research by extending the methodology to include other relevant risk factors besides mortality, and for different types of policies across companies.</p>

scholarly journals CAPM‐based capital budgeting and nonadditivity

2008 ◽  
Vol 26 (5) ◽  
pp. 388-398 ◽  
Author(s):  
Carlo Alberto Magni
Keyword(s):  
Decision Making ◽  
Net Present Value ◽  
Investment Decision ◽  
Capital Budgeting ◽  
Decision Makers ◽  
Capital Asset Pricing ◽  
Content Type ◽  
No Arbitrage ◽  
Asset Pricing Model ◽  
Investment Decision Making

PurposeIn investment decision making, the net present value (NPV) rule is often used alongside the well‐known capital asset pricing model (CAPM). In particular, the use of disequilibrium NPV is endorsed in corporate finance for both valuation and decision. The purpose of this paper is to test the reliability of this approach to capital budgeting valuations and decisions.Design/methodology/approachThe use of disequilibrium values for computing a project's NPV is considered, and the consistency with the CAPM is checked. The resulting valuation and decision are contrasted with the no‐arbitrage principle, which is universally considered a benchmark for rationality.FindingsThe paper finds that the disequilibrium NPV is logically deducted from the CAPM for decision‐making purposes. However, this NPV provides nonadditive values, which makes it inconsistent with the no‐arbitrage principle.Practical implicationsThe use of the CAPM+NPV procedure for valuing projects is invalid if disequilibrium values are used. Its use for decision making is logically valid but practically unsafe, because decision makers may frame equivalent courses of action in different ways, resulting in different decisions, which implies that they may incur arbitrage losses.Originality/valueThe literature does not distinguish between equilibrium and disequilibrium NPV nor between valuation and decision. This paper explicitly makes this distinction and the resulting consequences are highlighted.

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