CAPM

• Simultaneity: The discount rate depends on the standard deviation (risk) of the project. But value of the project depends on the discount rate again.
• Solution: Certainty equivalent version (Certainty Equivalent Cash Flow) of CAPM
• CAPM may not be the right model to value expected returns (ongoing academic debate)
• CAPM is not inconsistent with real options valuations as the CAPM can be used to value the underlying
• Required rate of return for a new venture:

$r_{proj}$ = $R_{F}+\beta _{proj}(r_{M}-r_{F})+{\text{Effort}}+{\text{Illiquidity}}$