Journal of Risk

Are real investment decisions based on risk-adjusted performance measures consistent with maximizing shareholder value?

Niklas Lampenius


We show that the use of risk-adjusted performance measures (RAPMs), such as the return on risk-adjusted capital (RORAC) or the risk-adjusted return on risk-adjusted capital (RARORAC), as decision criteria for real investment decisions might favor projects that do not maximize shareholder value for project selection of mutually exclusive projects. We find that RAPMs based on conditional value-at-risk (CVaR) are in general more consistent with the net present value (NPV) criterion than RAPMs based on value-at-risk (VaR). In addition, measures that are based on relative (C)VaR are more consistent with the NPV criterion than measures based on absolute (C)VaR. Overall, we find that the RARORAC based on the relative (C)VaR outperforms all evaluated RAPMs in this context.