Questions of error

In this month’s first Cutting Edge article, Thomas Wilson looks for a wayof answering the two questions together. According to Wilson, the managers offinancial institutions make a crucial error in allocating capital: they assumethat different business lines have the same cost of capital, which is used toset hurdle rates on projected returns for a given business. The result, he says,is destruction of shareholder value.

The benchmark for analysis of asset returns, the capital asset pricing model,s

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