If prices move almost at random, then why should we place any value on the CAPM, which makes predictions about expected asset returns?
Answer to relevant QuestionsContrast the historical approach to estimating expected returns with the probabilistic approach. If a particular stock had no systematic risk, only un-systematic risk, what would be its expected return? Why do managers focus on the effect that an investment will have on reported earnings rather than on the investments cash flow consequences? When a firm is faced with capital rationing, how can the profitability index (PI) be used to select the best projects? Why does choosing the projects with the highest PI not always lead to the best decision? Suppose that an analyst makes a mistake and calculates the NPV of an investment project by discounting the projects contribution to net income each year rather than by discounting its relevant cash flows. Would you expect ...
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