Evaluate the conceptual merits of applying CAPM theory to the problem of determining risk adjusted interest rates for capital budgeting purposes. Form your own opinion based on your study of CAPM (Chapter 9) and the knowledge you're now developing of capital budgeting. The issue is concisely summarized by Figure. Is the special concept of risk developed in portfolio theory applicable here? Don't be intimidated into thinking that because the idea is presented in textbooks, it's necessarily correct. Many scholars and practitioners feel this application stretches theory too far. On the other hand, others feel it has a great deal of merit. What do you think and why?
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