The Impact of Probability Distributions
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Volatility plays an essential role in real options valuation. In fact, real options models require volatility, which is also the most difficult input parameter to estimate. Higher volatility of the underlying leads to higher real options values. Therefore without volatility, real options provide no additional value for evaluation of investments and therefore it is better to rely on traditional capital budgeting techniques. Thus, when volatility is present, and the higher the better, real options is a very suitable tool for the assessment of investment decisions.
KeywordsProbability Distribution Uniform Distribution Shape Parameter Beta Distribution Real Option
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