Accounting Beta and Systematic Risk associated to capital investment projects

Abstract

In an ever increasingly unstable business environment, risk and uncertainty are always present to a higher or lower degree in decision making, and must, therefore, be carefully considered. Concerning, particularly, decisions related to investment, the risk represents essentially the volatility of the expected profits of an investment. When it comes to the analysis of capital investments, the appraisal of risk is essential for the choosing of projects to be executed. In order to do so, we made use of qualitative, or subjective, as well as quantitative, criteria, based on mathematical and statistic models, in order to obtain a concrete measurement of the predicted volatility of project cash flows, as well as their risk. In the present study, Accounting Beta is used to measure the inherent risk in capital investment projects, as defined by Richard A. Brealey and Stewart C. Myers for didactic purposes.