Abstract
In this paper we study the impact of an uncertain environment on the optimal dynamic investment policies of a value maximizing firm. We present a model in which risk-averse behavior of the shareholders is incorporated. We derive the policies that can be optimal for the firm and present solutions under different scenarios. After incorporating a dynamic version of the Capital Asset Pricing Model we can derive a new formula for the shareholders' time preference rate, which consists of the riskless interest rate and a risk premium.
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