The Journal of Finance SECURITY VALUATION Let us start from the familiar mean-variance security valuation theorem that under certain assumptions" it follows that for any security j (1) 3. The most important assumptions are (1) its single-period context, (2) no restrictions on short-selling and borrowing, and (3) a perfect and competitive securities market. However, Fama  has demonstrated that even though an individual has a concave multiperiod utility function, he will nonetheless behave in the first period as if he possesses some concave single-period utility function. This theorem is significant since if security returns are assumed normally distributed and intertemporally statistically independent, equation (1) applies even in a multiperiod setting where R j represents a first period rate of return. Nonetheless, the model remains incapable of valuing irregular or non-perpetual income streams over time and hence has not rigorously been applied to the analysis of dividend policy and capital budgeting projects with multiperiod receipts. Only if firms can in some way estimate the probability distribution of the market value of a project at the end of the first period (without knowing future discount rates) and sale of the project at that time does not result in synergistic losses
The Journal of Finance – Wiley
Published: Mar 1, 1973
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