Risk, Duration, and Capital Budgeting: New Evidence on Some Old Questions

Abstract

In a provocative article Campbell and Mei suggest that systematic risk arises not because of correlation between a company's cash flow and the market return but primarily because of common variation in expected returns. If true, the Campbell‐Mei hypothesis has important implications for capital budgeting, particularly at high‐technology companies that have long duration, idiosyncratic investment projects. This article presents some new evidence related to the Campbell‐Mei hypothesis and then evaluates the impact of the hypothesis with a case study of Amgen Corporation.