Evaluation of Risky Projects
Evaluation of Risky Projects
This chapter provides a short overview of the main concepts, ideas, and tools that have been produced by more than fifty years of research in the evaluation of risky projects and risky assets. It is devoted to the analysis of the risk premium for risky projects that should be added to the discount rate for safe projects. Here, valuing risky projects introduces a new dimension to the theory of investment. We have shown that this new dimension can be treated by transforming each future cash flow into its certainty equivalent. By doing this, one is back to the problem of evaluating a safe project, and the discount rates discussed in this book can be used.
Keywords: risky projects, risk, risk premium, safe projects, theory of investment, project valuation, risky assets, uncertain cash flows, risk management
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