Optimal Investment, Growth Options, and Security Returns

Optimal Investment, Growth Options, and Security Returns

As a consequence of optimal investment choices, a firm’s assets and growth options change in predictable ways. Using a dynamic model, we show that this imparts predictability to changes in a firm’s systematic risk, and its expected return. Simulations show that the model simultaneously reproduces: ~i! the time-series relation between the book-to-market ratio and asset returns; ~ii! the cross-se...

Optimal Timing of Information Security Investment: A Real Options Approach

This paper applies real options analytic framework to firms’ investment activity in information security technology and then a dynamic analysis of information security investment is explored by extending Gordon-Loeb (2002). The current research provides how firms have to respond to immediate or remote threat numerically. It shows that although positive drift of threat causes both larger and lat...

Investment , Valuation , and Growth Options ∗ Andrew

Optimal Geometric Mean Returns of Stocks and Their Options

The optimal geometric mean return is an important property of an asset. As a derivative of the underlying asset, the option also has this property. In this paper, we show that the optimal geometric mean returns of a stock and its option are the same from Kelly criterion. It is proved by using binomial option pricing model and continuous stochastic models with self-financing assumption. A simula...

Do Growth Options Affect Investment Decision-Making?

Many investments create both fixed assets and options for future investments, or “growth options”. It is natural to expect these future growth options to affect the timing of the initial decision to invest. This paper examines the impact of growth options on this initial decision in a capacity expansion context. We show that the impact of the growth options depends on whether the initial invest...