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The Multi-Period CAPM and the Valuation of Multi-Period Stochastic Cash Flows

Published online by Cambridge University Press:  06 April 2009

Hossein B. Kazemi
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Abstract

This paper develops a valuation formula for multi-period stochastic cash flows consistent with rational risk-averse investor behavior and equilibrium in securities markets. It shows that the CAPM does not have to be sequentially applied in discounting of the cash flows of multi-period projects, and a single beta can be used to measure the riskiness of an uncertain income stream. Hence, a multi-period project is priced as if it offers a single payment. The formula uses a set of assumptions that is slightly more restrictive than the minimum set Constantinides (1980) uses to produce the multi-period version of the CAPM. This paper also demonstrates that, under certain assumptions, covariances of stochastic cash flows with changes in the term structure may be sufficient measures of the cash flows' riskiness.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 26 , Issue 2 , June 1991 , pp. 223 - 231
Copyright
Copyright © School of Business Administration, University of Washington 1991

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