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Discounting under Uncertainty

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  • Fama, Eugene F

Abstract

Suppose asset pricing is governed by the CAPM or the ICAPM, and the expected one-period simple returns on the net cash flows of investment projects are constant through time. Then the net cash flows are priced by discounting their expected values with their expected one-period simple returns. But when net cash flows are priced by discounting their expected values with constant CAPM or ICAPM expected one-period simple returns, distributions of net cash flows more than one period ahead are likely to be skewed right. Expected payoffs are then larger than median pay-offs, and expected pay-offs are progressively more unusual outcomes for longer investment horizons. Copyright 1996 by University of Chicago Press.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 69 (1996)
Issue (Month): 4 (October)
Pages: 415-28

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Handle: RePEc:ucp:jnlbus:v:69:y:1996:i:4:p:415-28

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Web page: http://www.journals.uchicago.edu/JB/

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Cited by:
  1. Gürkan Kumbaroglu & Reinhard Madlener & Mustafa Demirel, 2004. "A Real Options Evaluation Model for the Diffusion Prospects of New Renewable Power Generation Technologies," CEPE Working paper series 04-35, CEPE Center for Energy Policy and Economics, ETH Zurich.
  2. Schosser, Josef, 2008. "Bewertung ohne "Kapitalkosten": Ein arbitragetheoretischer Ansatz zu Unternehmenswert, Kapitalstruktur und persönlicher Besteuerung," Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe 13, University of Passau, Faculty of Business and Economics.
  3. Magni, Carlo Alberto, 2009. "Correct or incorrect application of CAPM? Correct or incorrect decisions with CAPM?," European Journal of Operational Research, Elsevier, vol. 192(2), pages 549-560, January.
  4. Loderer, Claudio & Roth, Lukas, 2005. "The pricing discount for limited liquidity: evidence from SWX Swiss Exchange and the Nasdaq," Journal of Empirical Finance, Elsevier, vol. 12(2), pages 239-268, March.
  5. Andrew Ang & Jun Liu, 2004. "How to Discount Cashflows with Time-Varying Expected Returns," Journal of Finance, American Finance Association, vol. 59(6), pages 2745-2783, December.
  6. Han, Yufeng, 2012. "State uncertainty in stock markets: How big is the impact on the cost of equity?," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2575-2592.
  7. Lambert Jerman, 2013. "La Juste Valeur : Une Comptabilite Actuarielle Pour Les Marches ... Ou Les Comptables ?," Post-Print hal-00991877, HAL.
  8. Kryzanowski, Lawrence & Mohsni, Sana, 2010. "Capital returns, costs and EVA for Canadian firms," The North American Journal of Economics and Finance, Elsevier, vol. 21(3), pages 256-273, December.
  9. Jackson, Jerry, 2010. "Promoting energy efficiency investments with risk management decision tools," Energy Policy, Elsevier, vol. 38(8), pages 3865-3873, August.
  10. Yuri Biondi, 2009. "Capital budgeting under relational contracting: optimal ranking and duration criteria for schemes of concession, project-financing and public-private partnership," Post-Print hal-00442716, HAL.
  11. Hélène Raymond-Feingold & Bogdan Négréa & Christophe Moussu & Bertrand Maillet & Catherine Lubochinsky & Emmanuel Jurczenko & Jérôme Héricourt & Sylvain Friederich & Thierry Chauveau, 2004. "La volatilité des marchés augmente-t-elle ?," Revue d'Économie Financière, Programme National Persée, vol. 74(1), pages 17-44.
  12. Jan Kubíček & Leoš Vítek, 2010. "Evaluation of Public Projects from the Viewpoint of Social Rate of Discount," Politická ekonomie, University of Economics, Prague, vol. 2010(3), pages 291-304.
  13. Laitenberger, Jörg & Löffler, Andreas, 2002. "Capital Budgeting in Arbitrage-Free Markets," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Leibniz Universität Hannover dp-258, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  14. Alan Gregory, 2011. "The Expected Cost of Equity and the Expected Risk Premium in the UK," Review of Behavioral Finance, Emerald Group Publishing, vol. 3(1), pages 1-26, September.
  15. Bing-Huei Lin & Jerry Wang, 2003. "Systematic skewness in asset pricing: an empirical examination of the Taiwan stock market," Applied Economics, Taylor & Francis Journals, vol. 35(17), pages 1877-1887.
  16. Kothari, S. P., 2001. "Capital markets research in accounting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 105-231, September.

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