A Certainty-Equivalent Approach to the Valuation of Risky Real Estate Investments

  • December 22, 1983
  • • Written by: Murad Antia Steven D. Kapplin Richard Meyer

Fall/Winter 1983, Vol 8, No 2

Abstract: The authors present a variation on the capital asset pricing model (CAPM). The traditional format of the CAPM provides the means for estimating the risky discount rate required to value assets under conditions of risk. The methodology shown here is for estimating value directly without the need for estimating risky discount rates, using certainty equivalents and requiring the analyst to only estimate expected cash flows. These cash flows are adjusted to certainty equivalent cash flows which can be discounted at the risk-free rate of return.