Arbitrage-Free Valuation of Investment Projects Using Risk-Adjusted Discount Rates

Rapp, Marc Steffen

doi:10.2139/ssrn.520962

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Arbitrage-Free Valuation of Investment Projects Using Risk-Adjusted Discount Rates

17 Pages Posted: 15 Jun 2004

See all articles by Marc Steffen Rapp

Marc Steffen Rapp

University of Marburg - School of Business & Economics; University of Marburg - Marburg Centre for Institutional Economics (MACIE)

Date Written: July 29, 2004

Abstract

This short note discusses the link between the certainty equivalent approach of modern asset pricing theory and the cost of capital approach in DCF-models in a capital market model. Therefore we distinguish two notions of cost of capital: (a) risk-adjusted discount rates for a particular cash flow and (b) risk-adjusted returns of the project. In order to account for the flow of information both types are defined with respect to the valuation date.

Note: Downloadable document is in German.

Keywords: Risk neutral valuation, capital budgeting

JEL Classification: D81, G12, G31

Suggested Citation: Suggested Citation

Rapp, Marc Steffen, Arbitrage-Free Valuation of Investment Projects Using Risk-Adjusted Discount Rates (July 29, 2004). Available at SSRN: https://ssrn.com/abstract=520962 or http://dx.doi.org/10.2139/ssrn.520962