Models of Capital Budgeting, E-V VS E-S

Markowitz's [2] portfolio selection model was originally concerned with financial investments, but the model's implications for capital budgeting are now well recognized. Markowitz's basic idea is that the optimal portfolio for an investor is not simply any collection of good securiti...

Full description

Saved in:
Bibliographic Details
Published in:Journal of financial and quantitative analysis 1970-01, Vol.4 (5), p.657-675
Main Author: Mao, James C. T.
Format: Article
Language:English
Subjects:
Capital budgeting
Expected values
Financial Management
Investment decisions
Investment portfolios
Investment risk
Investors
Net present value
Probability distributions
Risk aversion
Utility functions
Citations: Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Markowitz's [2] portfolio selection model was originally concerned with financial investments, but the model's implications for capital budgeting are now well recognized. Markowitz's basic idea is that the optimal portfolio for an investor is not simply any collection of good securities, but a balanced whole, providing the investor with the best combination of “return” and “risk.” Return and risk are to be measured by the expected value and variance of the probability distribution of portfolio return. Although financial writers have generally accepted Markowitz's measure of return, they have not been completely satisfied with his suggested measure of risk [1]. In fact, Markowitz himself had reservations about choosing variance as a measure of risk.1 Besides variance, he considered five other alternative measures of risk: (1) The expected value of loss; (2) The probability of loss; (3) The expected absolute deviation; (4) The maximum expected loss; and (5) The semivariance.
ISSN:0022-1090
1756-6916
DOI:10.2307/2330119