A method of project selection based on capital asset pricing theories in a framework of mean–semideviation behavior

Abstract The competitiveness of a firm especially in the capital-intensive industries is highly dependent to a stream of successful and profitable projects. Having simulated the financial outcomes of a project, analysis of the output of simulation is then an important task that demands efficient methods for evaluation and selection of projects. The method in this article considers semideviation of return as the measure of risk of projects that is more consistent with the definition of risk as “the probability of unwanted outcomes”. Projects characterized by their expected return and semideviation of return are then entered into a project comparison system that is based on the arbitrage pricing theory (APT). The primary advantage of this method of project selection is in the collective assessment of the firm’s risk by all market participants.

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