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The Froot-Stein Model Revisited

Published online by Cambridge University Press:  10 May 2011

N. Høgh ,
O. Linton  and
J. P. Nielsen
N. Høgh
Affiliation:
Deloitte, Postboks 1600, 0900 kbh. C., Denmark., Email: nhoegh@deloitte.dk
O. Linton
Affiliation:
Department of Economics, London School of Economics, Houghton Street, London WC2A 2AE, U.K., Email: linton@lse.ac.uk
J. P. Nielsen
Affiliation:
Royal&SunAlliance Codan, 60 Gammel Kongevej, DK-1790 Copenhagen V, Denmark., Email: npj@codan.dk
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Abstract

We investigate the model of Froot & Stein (1998), a model which has very strong implications for risk management. We argue that their conclusions are too strong and need to be qualified. We also argue that their analysis is incorrect and incomplete. Specifically, there are some unusual consequences of their model, which may be linked to the chosen pricing formula.

Keywords

Capital BudgetingCAPMHedgingRisk ManagementSharpe Ratio
Type
Papers
Information
Annals of Actuarial Science , Volume 1 , Issue 1 , March 2006 , pp. 37 - 47
Copyright
Copyright © Institute and Faculty of Actuaries 2006

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