Risky Projects

In: Business and Management

Submitted By navram
Words 2911
Pages 12

When valuing a project, managers first forecast the future cash flows of the investment then discount them at the same calculated discount rate. The issue arises when managers are investing in risky projects because they tend to value the risky projects the same way they do riskless projects. Here we have highlighted the two appropriate methods used to value risky projects, the Risk-Adjusted Discount Rate method and the Certainty Equivalent Method.


Portfolio tracking is monitoring a collection of stocks, for the purpose of learning how the prices move and/or profiting from those movements.

The market price of a combination of financial investments that track the future cash flows of the project should be the same as the value of the projects future cash flows.

Analyst’s need to generate tracking portfolio’s with tracking error (a measure of how closely a portfolio follows the index to which it is benchmarked), PV=0 in order to value projects in these cases, i.e. Tracking Error = Cash Flows of Tracking Portfolio – Cash Flows of Project.

When tracking error exists, analysts use Asset Pricing Models, Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT), to derive projects PV.

If the CAPM holds, the tracking portfolio is a combination of the market portfolio and a risk free asset.

How to use tracking portfolio valuation

The idea is that we are trying to find the future cash flows of the project using a tracking portfolio

Assume there is perfect correlation between the Market Portfolio and the Project.

1. Value project using probabilities

2. Assume Tracking Portfolio with mix of Market Portfolio and Risk Free Asset

3. Calculate how much investment is required to track portfolio

4. Conclusion: Since portfolio of financial assets…...

Similar Documents

Risky Business: Executive Function, Personality

...Risky Business: Executive Function, Personality, and Reckless Behavior During Adolescence and Emerging Adulthood Henry Pharo, Clark Sim, Mikala Graham, Julien Gross, and Harlene Hayne University of Otago Adolescence is a risky business. Despite outstanding physical health, the risk of injury or death during adolescence is 2–3 times that of childhood. The primary cause of this increase in morbidity and mortality is heightened risky behavior including drinking, driving, drug-taking, smoking, and unprotected sex. Why is it that some adolescents take big risks, while others do not? One potential source of individual differences in risk-taking behavior may lie in individual differences in executive function including judgment, impulse control, self-monitoring, and planning. Researchers have hypothesized that limited brain system integration and efficiency, particularly in the prefrontal cortex and related structures, may be involved in the range and degree of risky behavior commonly exhibited by teens. In the present study, we examined the relation between risky behavior, personality factors, and performance on neuropsychological tests of executive function. The community sample of 136 adolescents aged 13- to 17-yearsold and 57 emerging adults aged 18- to 22-years-old exhibited marked individual differences in risk-taking behavior; participants’ scores on a alcohol, smoking, drugs, sex, driving, and antisocial behavior questionnaire ranged from 0 to near the......

Words: 1229 - Pages: 5

Risky Behavior

...Risky Adolescent Sexual Behavior: The Lack of Parental Supervision and Family Structure At the brink of the twenty-first century, some of the most controversial social issues come from the lack of parental supervision and family structure in the home; some of these issues include teenage pregnancy, statutory rape and the possibility of engaging in sexual activities that result in catching one or more sexually transmitted diseases. One might have a belief that engaging in sexual activity at a young age or before marriage is an immoral act. However, when adolescents grow up by themselves, they struggle to learn a normal sense of morality. Thus, lack of parental supervision and family structure in the home has a negative effect on adolescent sexual behavior. Social norms are the criteria that are used in today’s society in order to differentiate between right from wrong and what is considered normal and what is considered simply absurd. One of the “social norms” that society looks upon as abnormal is the lack of parental supervision and family structure in the home. People in this society tend to insinuate that parents should teach their children right from wrong, as they develop into young adults entering into the “real world”. Sexual Intercourse is natural and usually occurs in every person’s lifetime; however, when there is a lack of supervision and family structure in the home an adolescent’s sexual behavior begins to go astray. Rex Forehand, et al.(1999) states in the......

Words: 2372 - Pages: 10

A Risky Situation

...A Risky Situation Shortly after receiving my driver’s license, I find myself in a dangerous and frightening situation. Exposition: It’s a sunny and warm afternoon on my way home from work. I am tired and worn from working all day. My route home takes me through several intersections, one of which has a railroad crossing. As I approach this particular intersection, I am stopped by a red signal light, which leaves me two or three cars behind the crossing. The signal light finally changes from red to green and the line of cars starts to progress. Conflict: For some unknown reason the beat-up pick-up in front of me decides to stop, leaving the tail end of my car sitting on the railroad tracks. The truck appears to have clearance to move and the light is still green. As if on cue, I hear the dinging of the warning bell and see the crossing arms start to drop. I can see the approaching train getting closer to where I am sitting. It is blowing its horn several times to get me to move off the tracks. I am terrified and start to panic I can’t move forward because of the truck; I cannot move to the right or left either. I’m not sure how to remove my self from this location. The dented truck in front of me has two men sitting in the cab. The young man in the passenger seat turns around and looks at me. He shrugs his shoulders and holds up a can of what I think is beer as if to tell me there is nothing he can do. My anxiety level is at a high and I start to blow my horn hoping that...

Words: 430 - Pages: 2


... A PROJECT REPROT ON MUTUAL FUNDS IN INDIA EXECUTIVE SUMMARY In few years Mutual Fund has emerged as a tool for ensuring one’s financial well being. Mutual Funds have not only contributed to the India growth story but have also helped families tap into the success of Indian Industry. As information and awareness is rising more and more people are enjoying the benefits of investing in mutual funds. The main reason the number of retail mutual fund investors remains small is that nine in ten people with incomes in India do not know that mutual funds exist. But once people are aware of mutual fund investment opportunities, the number who decide to invest in mutual funds increases to as many as one in five people. The trick for converting a person with no knowledge of mutual funds to a new Mutual Fund customer is to understand which of the potential investors are more likely to buy mutual funds and to use the right arguments in the sales process that customers will accept as important and relevant to their decision. This Project gave me a great learning experience and at the same time it gave me enough scope to implement my analytical ability. The analysis and advice presented in this Project Report is based on market research on the saving and investment practices of the investors and preferences of the investors for investment in Mutual Funds. This Report will help to know about the investors’ Preferences in Mutual Fund means Are they prefer any particular Asset Management......

Words: 18964 - Pages: 76

College Students Engaging in Risky Behavior

...to 28 percent by fall of freshman year. Along with blackouts, drinking has also led to reckless and dangerous behavior. According to an article by Valerie Strauss, “Each year an estimated 1,825 college students (between the ages of 18 and 24)… die from alcohol- related unintentional injuries, including motor vehicle crashes…(about) 599,000… are unintentionally injured under the influence of alcohol… 696,000… are assaulted by another student who has been drinking…97,000 students …are victims of alcohol-related sexual assault or date rape… 400,000 … have unprotected sex, and more than 100,000 students…report having been too intoxicated to know if they consented to having sex.” Not only has drinking been the leading cause of hazardous and risky action, alcohol has also been found to interfere with students’ academics. “About one-quarter of college students report having academic consequences because of their drinking, including missing class, falling behind, doing poorly on exams or papers, and receiving lower grades overall” (Strauss). Strauss also includes that, “nineteen percent of college students between the ages of 18 and 24 met the criteria for alcohol abuse or dependence, but only 5 percent of these students sought treatment for alcohol problems in the year preceding the survey. Each year an estimated 3,360,000 students between the ages of 18 and 24 drive under the influence of alcohol. These include suicide attempts, health problems, vandalism, property damage, and......

Words: 1018 - Pages: 5


...outlets portray males and females in image advertisements, researchers can help determine the presence of bias’ and ideological frameworks. Image Advertising  Print advertising has been an area of concern for many decades.  Businesses have realized that advertising is an effective way to draw in consumers and dramatically increase profits. Advertising images are used as a means to create sensation and provide information about services or products that a specific company offers to its consumers. The prominence of advertisements in our everyday interaction with media raises many critical concerns for scholars.  The popularity of mediated resources such as fashion magazines, television and the Internet has made it easier for agencies to project advertisements.  The consumers of these resources are often young women or adolescents.      Researchers have debated on the number of advertisements consumers view on a daily basis; however, the average is most likely in the thousands.  Due to this staggering statistic it is extremely important that scholars critically evaluate advertisement campaigns. Advertisements often include idealized body images and a skewed depiction of gender.  According to Shields (1997), the persuasive images that are presented in advertisements have a direct correlation to how social identities are constructed and maintained in our society.  One of the most controversial producers of advertisements is fashionable clothing designer, Calvin Klein.......

Words: 1510 - Pages: 7

Risky Behavior

...Phenomenon of risky behavior: NSSI •Health behavior models and theories for understanding risky behavior Human behavior is complex and describing and predicting it continues to be a challenge in social science. Social influence, such as drugs, family, peers, media, has a great impact on development of negative behavior that would require intervention or prevention to make changes in health and behavioral habits by examining the behaviors of findings based on current research and theories /models of behavioral change. Per Heilbron et al. (2008) many current research focused on prevalent and risky group of self –harm behaviors that are growing mostly due to social, peer influence engaging in NSSI. Nonsuicidal self-injury (NSSI) is one of prevalent health behavior risks in pre-adolescence and adolescence, and many fields have offered theories and models that can be important applications for research on peer influence and change of behavior in NSSI groups for behavioral change (Heilbron et al. 2008). Behavioral theories of peer influence are one application to determine NSSI based on Social Cognitive Theory (SCT, originally social learning theory) (Ragin, 2011). Social cognitive theory (SCT) is the psychological model of behavior developed by the work of Albert Bandura (1977; 1986). SCT (Ragin (2011) suggests that cognitive processes are serious to the acquisition and regulation of behaviors, and individuals learn through modeling, direct operant reinforcement with......

Words: 1750 - Pages: 7

Apples Profitable but Risky Strategy

...Strategic Management Case plus Case Answer – Apple’s Profitable but Risky Strategy Case study Apple’s profitable but risky strategy When Apple’s Chief Executive – Steven Jobs – launched the Apple iPod in 2001 and the iPhone in 2007, he made a significant shift in the company’s strategy from the relatively safe market of innovative, premium-priced computers into the highly competitive markets of consumer electronics. This case explores this profitable but risky strategy. Note that this case explores in 2008 before Nokia had major problems with smartphones – see Case 9.2 and Case 15.1 for this later situation. Early beginnings To understand any company’s strategy, it is helpful to begin by looking back at its roots. Founded in 1976, Apple built its early reputation on innovative personal computers that were par-ticularly easy for customers to use and as a result were priced higher than those of competitors. The inspiration for this strategy came from a visit by the founders of the company – Steven Jobs and Steven Wozniack – to the Palo Alto research laboratories of the Xerox company in 1979. They observed that Xerox had developed an early version of a computer interface screen with the drop-down menus that are widely used today on all personal computers. Most computers in the late 1970s still used complicated technical interfaces for even simple tasks like typing – still called ‘word-processing’ at the time. Jobs and Wozniack took the concept back to Apple......

Words: 2834 - Pages: 12

Chapter 7: Optimal Risky Portfolios

...CHAPTER 7: OPTIMAL RISKY PORTFOLIOS CHAPTER 7: OPTIMAL RISKY PORTFOLIOS PROBLEM SETS 1. 2. (a) and (e). (a) and (c). After real estate is added to the portfolio, there are four asset classes in the portfolio: stocks, bonds, cash and real estate. Portfolio variance now includes a variance term for real estate returns and a covariance term for real estate returns with returns for each of the other three asset classes. Therefore, portfolio risk is affected by the variance (or standard deviation) of real estate returns and the correlation between real estate returns and returns for each of the other asset classes. (Note that the correlation between real estate returns and returns for cash is most likely zero.) (a) Answer (a) is valid because it provides the definition of the minimum variance portfolio. The parameters of the opportunity set are: E(rS) = 20%, E(rB) = 12%, σS = 30%, σB = 15%, ρ = 0.10 From the standard deviations and the correlation coefficient we generate the covariance matrix [note that C o v ( rS , rB )     S   B ]: Bonds Stocks Bonds 225 45 Stocks 45 900  B  Cov ( r S , r B ) 2 3. 4. The minimum-variance portfolio is computed as follows: wMin(S) =  S   B  2 Cov ( r S , r B ) 2 2  225  45 900  225  ( 2  45 )  0 . 1739 wMin(B) = 1  0.1739 = 0.8261 The minimum variance portfolio mean and standard deviation are: E(rMin) = (0.1739 × .20) + (0.8261 × .12) = .1339 = 13.39% σMin = [w S S  w 2 2 2 B  2 B  2w Sw ...

Words: 3834 - Pages: 16


...We're committed to providing 100% plagiarism free academic assignments i.e. Course work, Homework assignments, thesis, dissertations, Oxford Brookes (OBU) BSC Hons Applied Accounting ACCA Thesis (RAP, SLS, PPT), Essays and Term/Research papers etc. Pay in instalments and that too after you receive the first draft. Please visit and like our Facebook page www.facebook.com/assignmentwritingservices/ and website www.ghostwritingmania.com to avail our special discount packages. You can also add me on Skype ghostwritingmania or email me ghostwritingmania@yahoo.com for any further discussion...Looking forward to working together on long term. Project Objectives and Research Approach: The topic I selected for my BSc RAP is ‘The Business and Financial Performance of an Organization over a three year period.’ Reasons for choosing the Topic: For any organization to breath it is essential that it copes with environment through its strengths and strategies and manages finance effectively. An organization’s Business & Financial performance plays a leading role in deciding its position in the industry. That’s why I chose this topic as it is even more important to know an organization’s performance during a Global Economic meltdown when markets have been declining. Even more, this has been the major part of my studies and I had a chance to enhance my knowledge and develop practical skills in the area. Reasons for choosing the Industry: I chose automobile industry as it is a......

Words: 7152 - Pages: 29


...BANK LTD. Prepared by Md. Nizam Uddin Forhad ID: 112011097 Supervised by Palash Kumar Kundu Senior Lecturer Submitted in Partial Fulfillment of the Requirements for the Degree Bachelor of Business Administration Date: 09 August 2015 Internship Report Approval Form Student Name MD. Nizam Uddin Forhad ID No.112011097 Major: Accounting Year: 2015 Local Phone: +8801675000325 Email: nizam.uddin.bba@ulab.edu.bd --------------------------------------------------------------------------------------------------------------------------- INTERNSHIP/PROJECT INFORMATION Internship Organization/Project: Janata Bank Ltd. Internship /Project Report Topic: Loan Disbursement and Recovery System _____________________________________________________________________________________ _____________________________________________________________________________________ Semester (Tick one): □ spring 2015 □ summer 2015 □ fall 2015 --------------------------------------------------------------------------------------------------------------------------- SUPERVISOR APPROVAL (Please place a Tick) □ Approved □ Not Approved □ Partial Re-write □ Full Re-write Remarks (If Not Approved/Pretrial/Full Rewrite):......

Words: 8224 - Pages: 33


...CIS Quiz: Decision Structures and Boolean Logic Multiple Choice : 1. C. Decision 2. B. Single alternative decision 3. B. Decision 4. D. Boolean 5. A. Relational 6. C. Dual alternative decision 7. B. If-Then 8. C. If-Then-Else 9. D. Multiple alternative decision 10. B. Default 11. B. Logical 12. A. AND 13. B. OR 14. C. NOT 15. A. Flag True or False: 1. False 2. True 3. False 4. True 5. True Short Answer: 1. Conditionally Executed - is called a single alternative decision structure because it provides only one alternative path of execution. The action is conditionally executed because it is performed only when a certain condition is true. 2. I will use the “If” statement because it is a dual alternative decision structure.   3. The case structure let’s the value of a variable or an expression determine which path of execution the program will take.   4. The AND operator takes two Boolean expressions as operands and creates a compound Boolean expression that is True only when both sub-expressions are true.   5. The OR operators take two Boolean expressions as operands and creates a compound Boolean expression that is true when either of the sub-expressions is true. The following is an example of an If-Then statement that uses the OR operator:   6. The AND operator would be the best to use to determine whether or not a number is within a given range. 7. A......

Words: 286 - Pages: 2

How Risky Is Your Uber Driver?

...THE DAILY NEWS How risky is your Uber ride ? Boston Native Alejandro Done Age 47, guilty serving 12 years in prison for raping a young female passenger. Uber is a multinational transportation service that allows drivers to use their own cars and be their own bosses. Uber has become the most preferred and widespread transportation services, due to its convenience and cheaper fare rides than taxis. However, this expansion has led to several faulty background checks on drivers that resulted in several rape incidents. Since Uber is a cheaper way of moving around, drivers have to put more hours of work and tend to be from low to middle class backgrounds. Uber has provided so many people with work opportunities by making it easy to apply. As the company grew in size, background checks have lagged and employing just anyone doesn’t always work out for the best. Alejandro Done a Boston native Uber driver was charged with aggravated rape, including kidnapping and assault and battery. The driver pled guilty to raping a young women that was told she had to pay cash for her ride knowing that Uber only takes credit/debit card transactions. Done took the women to a secluded area, in order to withdraw cash from the ATM and ended up physically assaulting her. This story was one of the many incidents that have been occurring with Uber drivers around the world. So, is it worth risking your life for a cheaper ride? Rape can be defined as unwanted sexual intercourse or physical...

Words: 1260 - Pages: 6

Apple's Profitable but Risky Strategy

...APPLE’S PROFITABLE BUT ISKY STRATEGY Case Study [Type the author name]   CASE STUDY ON PROFITABLE BUT RISKY STRATEGY OF APPLE INTRODUCTION: A long term plan and action that is formulated to help a company to setback and achieve a competitive advantage against its competitor and rival is called competitive strategy. This type of strategy is frequently used in marketing, promotion and advertising operations by somehow questioning the rivalry's service or product. Competitive strategies are vital to businesses which are competing in markets for the leading position, the market which is deeply saturated with substitutes for consumers. (Porter,2008). This case study is truly about the competitive strategy of Apple. Apple was founded in 1976 by two Steve Job and Steve Wozniak. Apple initiated its early reputation by making user friendly personal computers and keeping the price high against those made by the competitors. Their first computer was the Apple Macintosh (MAC). It was launched in 1984. From the very first, Apple’s strategy was innovative and profitable. Innovation brings risk with it. So Apple always followed innovative, risky but a highly profitable strategy. Apple is a front line company in industry of electronics whether in cell phones, tablets, personal computers and music devices etc. Apple’s software is actually the one which is greatly designed and programmed. Apple charge premium and comparatively high price from the consumers when compared with......

Words: 2533 - Pages: 11


... | CONTENTS ➢ Acknowledgement……………………………….. ➢ Objective…………………………………………1 ➢ Covariance………………………………………. ➢ Correlation………………………………………. ➢ Beta and its role…………………………………. ➢ Beta coefficient………………………………….. ➢ Capital asset pricing model (capm)……………... ➢ Cost of equity……………………………………. ➢ Weighted average cost of capital (wacc)………... ➢ Bibliography……………………………………... ACKNOWLEDGEMENT I would like to express my gratitude to our finance professor MR. JADHAV ADITYA MOHAN who gave us the opportunity and subsequent guidance to complete this project. A mission of this project was to get practical insight of the chemical and fertiliser industry. This project helped us in learning of financial concepts by applying them and ascertaining the various financial details of the companies. At last the team work and effort showed by each group member made this project a success. OBJECTIVE To calculate and interpret the value of Beta calculated using the returns of selected companies of Chemicals and fertilizer industry of India and deriving at the conclusion as to which company to invest in considering the risk taking appetite of the investor. CONCEPTS USED COVARIANCE Covariance is a statistical quantity which measures the relationship between two random variables. In case of returns of financial securities covariance measures relationship between returns of two securities. ......

Words: 2479 - Pages: 10