AN OPERATIONAL APPROACH TO RISK-SCREENING

WHETHER A PARTICULAR MEASURE IS USED IN THE CAPITAL BUDGETING PROCESS DOES NOT SEEM TO DEPEND SO MUCH ON ITS DATA DEMANDS, AS IT DOES ON THE ABILITY TO TRANSLATE THE MEASURE INTO A SIMPLE FORM TO WHICH SENIOR EXECUTIVES CAN RELATE THEIR INTUITION AND EXPERIENCE. FORMAL MEASURES FOR RISK-SCREENING SELDOM HAVE BEEN PUT TO USE IN THE CAPITAL BUDGETING PROCESS. THE REASON FOR THIS MAY BE THAT SIMPLE, USEFUL MEASURES WHICH REFLECT RISK AND CAN BE MATCHED WITH ACCEPTANCE CRITERIA HAVE NOT BEEN AVAILABLE. TUTTLE AND LITZENBERGER OFFER TWO RATIOS OF RETURN TO RISK WHICH TOGETHER,MAY SATISFY THE REQUIREMENTS OF SIMPLICITY AND USEFULNESS. THESE MEASURES CAN HAVE A PROBLEM OF MISMATCHING MARKET CRITERIA WITH PROJECT MEASURES, HOWEVER. HERE, THE AUTHORS HAVE TRIED TO ILLUSTRATE THIS PROBLEM AND TO SUGGEST AN APPROACH THAT WILL WORK AROUND IT EFFECTIVELY.