Corporate investment appraisal with possibilistic CAPM

The Capital Asset Pricing Model (CAPM) is a useful tool in the estimation of the equity cost in the cost of capital computation. This work proposes a method to limit problems arising from the CAPM assumptions. The main tools are the possibilistic mean and the possibilistic variance/covariance of fuzzy numbers as they are introduced by Carlsson and Fullér (2001) [3]. The results of this method are a possibilistic CAPM beta value and a possibilistic value for the market premium. These values lead to a possibilistic set-up of CAPM and then to the computation of the after tax Weighted Average Cost of Capital (WACC). The data for this work is fuzzy and derives from experts in investments and specialists in “deciphering” the information flowing from financial markets. Finally, a computational algorithm of five steps and a numerical example are presented for thorough comprehension of the proposed method.