How Are Mean-Variance Analysis and the CAPM Useful to Corporations

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The Answer is Corporations can use mean-variance analysis to hedge their risks optimally and diversify their portfolios of real investment projects.However,one of the lessons of the CAPM is that,while diversifying investments can reduce the variance of a firm's share price,it does not reduce the firm's cost of capital.As a result,a corporate diversification strategy can create value for a corporation only if the diversification increases the expected returns of the real asset investments of the corporation.Corporations also use the CAPM and mean-variance analysis to evaluate their capital expenditure decisions.Financial managers use the insights of mean-variance analysis and the CAPM not only to derive important conclusions about how to value real assets,but also to understand how debt financing affects the risk and the required return of equity.

How Are Mean-Variance Analysis and the CAPM Useful to Corporations

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