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- W7958257 abstract "A new model for capital budgeting is derived from a manager's optimizing behavior that, unlike the capital asset pricing model (CAPM), prices total risk. Manager risk preferences are characterized by a constraint on the probability of ruin, otherwise known as a Value-at-Risk or Telser constraint. More generally, the manager picks a floor value to the firm or fund, which may be stochastic, and his maximum tolerable probability that the floor value is breached. Subject to this constraint, he maximizes the firm's expected value. The manager uses his reservation price of risk, which is a contract's expected payoff or its expected payoff given that the firm's value equals the floor. This price is applicable to continuous distributions with well-defined expectations and conditional expectations, and the model has a simple pricing formula like the CAPM that reduces to the security market line equation as a special case. However the model differs significantly from the CAPM in eight other ways. For example, a manager using this model need not be classifiable as variance averse; and the model can be used with distributions that have infinite variances. Also unlike models that price only systematic risk, this model does not imply that some significant markets for insurance policies on idiosyncratic events should not exist. Models that price only systematic risk assign risk-neutral prices to policies with idiosyncratic payouts, so unless buying insurance lowers net expected losses, these models imply that markets for policies on idiosyncratic events should not exist." @default.
- W7958257 created "2016-06-24" @default.
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- W7958257 date "2005-01-01" @default.
- W7958257 modified "2023-09-25" @default.
- W7958257 title "A Price of Total Risk for Managing against a Benchmark" @default.
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- W7958257 doi "https://doi.org/10.2139/ssrn.835984" @default.
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