Value and Risk: Beyond Betas

Posted: 5 May 2005

See all articles by Aswath Damodaran

Aswath Damodaran

New York University - Stern School of Business

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Risk can be both a threat to a company's financial health and an opportunity to get ahead of the competition. Most analysts, when referring to risk management, focus on the threat and emphasize protecting against that threat (i.e., risk hedging). The risk associated with an investment is generally reflected in the discount rate used in conventional discounted cash flow models, and because analysts also assume that only market risk affects discount rates, the firms that spend time and resources on hedging company-specific risk may well lose value. But risk management can increase firm value - by altering investment policy and creating competitive advantages, which can have consequences for expected growth rates and excess returns.

Keywords: Equity Investments, Fundamental Analysis, Valuation Models, Risk Measurement, Management, Firm/Enterprise Risk, Corporate Finance, Capital Investment Decisions

Suggested Citation

Damodaran, Aswath, Value and Risk: Beyond Betas. Financial Analysts Journal, Vol. 61, No. 2, pp. 38-43, March/April 2005, Available at SSRN:

Aswath Damodaran (Contact Author)

New York University - Stern School of Business ( email )

Stern School of Business
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New York, NY 10012-1126
United States
212-998-0340 (Phone)
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