In estimating a firm's cost of equity with the CAPM the standard procedure is to proxy the market portfolio by a share index. Since this index is not the market portfolio this may give rise to a bias in estimating the firm's cost of equity. This paper investigates this bias and concludes that it...

Lally (1998) shows that when the “market” portfolio against which equity betas are measured constitutes a share portfolio, which is the usual case, then equity betas are sensitive to market as well as firm specific leverage. This paper explores the application of this idea to the widespread...

This paper derives the relationship between a stock's beta and its weighting in the portfolio against which its beta is calculated. Contrary to intuition the effect of this market weight is in general very substantial. We then suggest an alternative to the conventional measure of abnormal...

Azar (2007) argues that an appropriate market-based estimate of the US real social discount rate is 5.66%, with a 95% confidence interval ranging from 5.62 to 5.71%. However, this line of argument implicitly and wrongly equates the risk on public sector projects with that for the optimal...

The valuation model which discounts expected dividends is widely accepted in the finance literature. Beyond some point a constant growth rate in expected dividends is assumed. The accepted specification of this growth rate involves a constant retention rate for earnings, and is valid under no...

Hall (2007) challenges a fundamental point in the analysis of Lally (2007) and earlier papers: if the risk free rate within the allowed rate of return matches the regulatory term, then the present value of future cash flows PV0 equals equity holders initial investment C(1-L). Hall argues that...

This paper examines the appropriate term of the risk free rate to be used by a regulator in price control situations, most particularly in the presence of corporate debt. If the regulator seeks to ensure that the present value of the future cash flows to equity holders equals their initial...