Alternatives to the CAPM: Part 5. Risk Adjusting the cash flows
aswathdamodaran.substack.com
In the last four posts, I laid our alternatives to the CAPM beta, but all of them were structured around adjusting the discount rate for risk. Having made this pitch many times in the past, I know that there are some of you who wonder why I don't risk adjust the cash flows instead of risk adjusting the discount rate. The answer to that question, though, depends on what you mean by risk adjusting the cash flows. For the most part, here is what the proponents of this approach seem to mean. They will bring in the possibility of bad scenarios (and the outcomes from these scenarios) into the expected cash flows and thus risk adjust them. As I will argue below, that is not risk adjustment.
Alternatives to the CAPM: Part 5. Risk Adjusting the cash flows
Alternatives to the CAPM: Part 5. Risk…
Alternatives to the CAPM: Part 5. Risk Adjusting the cash flows
In the last four posts, I laid our alternatives to the CAPM beta, but all of them were structured around adjusting the discount rate for risk. Having made this pitch many times in the past, I know that there are some of you who wonder why I don't risk adjust the cash flows instead of risk adjusting the discount rate. The answer to that question, though, depends on what you mean by risk adjusting the cash flows. For the most part, here is what the proponents of this approach seem to mean. They will bring in the possibility of bad scenarios (and the outcomes from these scenarios) into the expected cash flows and thus risk adjust them. As I will argue below, that is not risk adjustment.