42,964 research outputs found

    Capital Budgeting Theory and Practice: A Review and Agenda for Future Research

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    Purpose - The main purpose of this research was to delineate unearth lacunae in the extant capital budgeting theory and practice during the last two decades and ipso facto become springboard for future scholarships. Design/methodology/approach - Web of science search and iCat search were used to locate research papers published during the last twenty years. Four criteria have been applied in selection of research papers: be an empirical study, published in English language, appeared in peer reviewed journal and full text research papers. These papers were collected from multiple databases including OneFile (GALE), SciVerse ScienceDirect (Elsevier), Informa - Taylor & Francis (CrossRef), Wiley (CrossRef), Business (JSTOR), Arts & Sciences (JSTOR), Proquest ,MEDLINE (NLM), and Wiley Online Library. Search parameters covered capital budgeting, capital budgeting decision, capital budgeting theory, capital budgeting practices, capital budgeting methods, capital budgeting models, capital budgeting tools, capital budgeting techniques, capital budgeting process and investment decision. Thematic text analyses have been explored to analyses them. Findings - Recent studies lent credence on the use of more sophisticated capital budgeting methods along with many capital budgeting tools for incorporating risk. Notwithstanding, it drew a distinction between developed and developing countries. Moreover, factors impinging on choice of capital budgeting practice were identified, and bereft of behavioural finance and event study methodological approach were highlighted. More extensive studies are imperative to build robust knowledge of capital budgeting theory and practice in the chaotic environment. Policy recommendation – This research was well thought out in its design and contributed by stating the known and unknown arena of capital budgeting during the last two decades. This scholarship facilitates to academics, practitioners, policy makers, and stakeholders of the company Limitations - Limitations of this study were primarily concerned with Tower of Babel Bias and time constraint. Keywords: Capital budgeting theory and practices, capital budgeting tools for incorporating risk, discount rate Paper type: Literature revie

    Managing risk exposures using the risk budgeting approach

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    The ongoing economic crisis has profoundly changed the industry of the asset management, by putting risk management at the heart of most investment processes. This new risk-based investment style does not rely on returns forecasts and is therefore assumed to be more robust. In 2011, it has particularly encountered a great success with the achievement of minimum variance, ERC and risk parity strategies in portfolios of several large institutional investors. These portfolio constructions are special cases of a more general class of allocation models, known as the risk budgeting approach. In a risk budgeting portfolio, the risk contribution from each component is equal to the budget of risk defined by the portfolio manager. Unfortunately, even if risk budgeting techniques are widely used by market practitioners, they are few results about the behavior of such portfolios in the academic literature. In this paper, we derive the theoretical properties of the risk budgeting portfolio and show that its volatility is located between those of minimum variance and weight budgeting portfolios. We also discuss the existence, uniqueness and optimality of such a portfolio. In a second part of the paper, we propose several applications of risk budgeting techniques for risk-based allocation, like risk parity funds and strategic asset allocation, and equity and bond alternative indexations

    Managing risk exposures using the risk budgeting approach

    Get PDF
    The ongoing economic crisis has profoundly changed the industry of the asset management, by putting risk management at the heart of most investment processes. This new risk-based investment style does not rely on returns forecasts and is therefore assumed to be more robust. In 2011, it has particularly encountered a great success with the achievement of minimum variance, ERC and risk parity strategies in portfolios of several large institutional investors. These portfolio constructions are special cases of a more general class of allocation models, known as the risk budgeting approach. In a risk budgeting portfolio, the risk contribution from each component is equal to the budget of risk defined by the portfolio manager. Unfortunately, even if risk budgeting techniques are widely used by market practitioners, they are few results about the behavior of such portfolios in the academic literature. In this paper, we derive the theoretical properties of the risk budgeting portfolio and show that its volatility is located between those of minimum variance and weight budgeting portfolios. We also discuss the existence, uniqueness and optimality of such a portfolio. In a second part of the paper, we propose several applications of risk budgeting techniques for risk-based allocation, like risk parity funds and strategic asset allocation, and equity and bond alternative indexations

    Capturing Risk in Capital Budgeting

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    NPS NRP Project PosterThis proposed research has the goal of proposing novel, reusable, extensible, adaptable, and comprehensive advanced analytical process and Integrated Risk Management to help the (DOD) with risk-based capital budgeting, Monte Carlo risk-simulation, predictive analytics, and stochastic optimization of acquisitions and programs portfolios with multiple competing stakeholders while subject to budgetary, risk, schedule, and strategic constraints. The research covers topics of traditional capital budgeting methodologies used in industry, including the market, cost, and income approaches, and explains how some of these traditional methods can be applied in the DOD by using DOD-centric non-economic, logistic, readiness, capabilities, and requirements variables. Stochastic portfolio optimization with dynamic simulations and investment efficient frontiers will be run for the purposes of selecting the best combination of programs and capabilities is also addressed, as are other alternative methods such as average ranking, risk metrics, lexicographic methods, PROMETHEE, ELECTRE, and others. The results include actionable intelligence developed from an analytically robust case study that senior leadership at the DOD may utilize to make optimal decisions. The main deliverables will be a detailed written research report and presentation brief on the approach of capturing risk and uncertainty in capital budgeting analysis. The report will detail the proposed methodology and applications, as well as a summary case study and examples of how the methodology can be applied.N8 - Integration of Capabilities & ResourcesThis research is supported by funding from the Naval Postgraduate School, Naval Research Program (PE 0605853N/2098). https://nps.edu/nrpChief of Naval Operations (CNO)Approved for public release. Distribution is unlimited.

    Capturing Risk in Capital Budgeting

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    NPS NRP Technical ReportThis proposed research has the goal of proposing novel, reusable, extensible, adaptable, and comprehensive advanced analytical process and Integrated Risk Management to help the (DOD) with risk-based capital budgeting, Monte Carlo risk-simulation, predictive analytics, and stochastic optimization of acquisitions and programs portfolios with multiple competing stakeholders while subject to budgetary, risk, schedule, and strategic constraints. The research covers topics of traditional capital budgeting methodologies used in industry, including the market, cost, and income approaches, and explains how some of these traditional methods can be applied in the DOD by using DOD-centric non-economic, logistic, readiness, capabilities, and requirements variables. Stochastic portfolio optimization with dynamic simulations and investment efficient frontiers will be run for the purposes of selecting the best combination of programs and capabilities is also addressed, as are other alternative methods such as average ranking, risk metrics, lexicographic methods, PROMETHEE, ELECTRE, and others. The results include actionable intelligence developed from an analytically robust case study that senior leadership at the DOD may utilize to make optimal decisions. The main deliverables will be a detailed written research report and presentation brief on the approach of capturing risk and uncertainty in capital budgeting analysis. The report will detail the proposed methodology and applications, as well as a summary case study and examples of how the methodology can be applied.N8 - Integration of Capabilities & ResourcesThis research is supported by funding from the Naval Postgraduate School, Naval Research Program (PE 0605853N/2098). https://nps.edu/nrpChief of Naval Operations (CNO)Approved for public release. Distribution is unlimited.

    Capturing Risk in Capital Budgeting

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    NPS NRP Executive SummaryThis proposed research has the goal of proposing novel, reusable, extensible, adaptable, and comprehensive advanced analytical process and Integrated Risk Management to help the (DOD) with risk-based capital budgeting, Monte Carlo risk-simulation, predictive analytics, and stochastic optimization of acquisitions and programs portfolios with multiple competing stakeholders while subject to budgetary, risk, schedule, and strategic constraints. The research covers topics of traditional capital budgeting methodologies used in industry, including the market, cost, and income approaches, and explains how some of these traditional methods can be applied in the DOD by using DOD-centric non-economic, logistic, readiness, capabilities, and requirements variables. Stochastic portfolio optimization with dynamic simulations and investment efficient frontiers will be run for the purposes of selecting the best combination of programs and capabilities is also addressed, as are other alternative methods such as average ranking, risk metrics, lexicographic methods, PROMETHEE, ELECTRE, and others. The results include actionable intelligence developed from an analytically robust case study that senior leadership at the DOD may utilize to make optimal decisions. The main deliverables will be a detailed written research report and presentation brief on the approach of capturing risk and uncertainty in capital budgeting analysis. The report will detail the proposed methodology and applications, as well as a summary case study and examples of how the methodology can be applied.N8 - Integration of Capabilities & ResourcesThis research is supported by funding from the Naval Postgraduate School, Naval Research Program (PE 0605853N/2098). https://nps.edu/nrpChief of Naval Operations (CNO)Approved for public release. Distribution is unlimited.

    Diagnosing performance management and performance budgeting systems: A case study of the U.S. Navy

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    We present here a case study of an organization within the U.S. Navy that created a new organizational construct and performance management system. We explore the issues faced by naval leaders as they attempt to use their performance information to make resource allocation decisions at the sub-organization level, and base budgets at the organization and service (navy) level. We attempt to diagnose many of the practical problems a government organization encounters when implementing a performance management system, to include trying to inform budgets, and make recommendations on actions that would improve the strength of the performance system. We find in the organization a good conceptual framework, organizational enthusiasm, and reasonable attempts to link disparate information systems into a coherent whole. The good intentions are hindered, however, by inadequate accounting systems, a lack of understanding of cost accounting methods, weak use of terminology and longstanding institutional attitudes. This case confirms challenges associated with both performance management systems and performance budgeting found in the literature, and we offer recommendations for public officials considering such endeavors
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