Theoretical flaws in the use of CAPM for investment decisions

This paper uses counterexamples and simple formalization to show that the standardCAPM-based Net Present Value may not be used for investment valuations. The reason is that thestandard CAPM-based capital budgeting criterion implies a notion of value which does not complywith the principle of additivity. Framing effects arise in decisions so that different descriptions ofthe same problem lead to different choices. As a result, the CAPM-based NPV as a tool for valuingprojects and making investment decisions is theoretically unsound, even if the CAPM assumptionsare met