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The Valuation of Long-Dated Assets

  • Ian Martin

The expected time- and risk-adjusted cumulative return on any asset equals one at all horizons. Nonetheless, I show that a typical asset's realized time- and risk-adjusted cumulative return tends to zero almost surely. As a corollary, the value of a typical long-dated asset is driven by extreme events: either by good news at the level of the individual asset or by bad news at the aggregate level. In the case of the aggregate market, the fact that its Sharpe ratio is higher than its volatility suggests that bad news is the relevant consideration in practice.

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File URL: http://www.nber.org/papers/w16219.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16219.

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Date of creation: Jul 2010
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Publication status: published as Ian Martin, 2012. "On the Valuation of Long-Dated Assets," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 346 - 358.
Handle: RePEc:nbr:nberwo:16219
Note: AP
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