Discounting under Uncertainty

Eugene Fama ()

The Journal of Business, 1996, vol. 69, issue 4, 415-28

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.

Date: 1996
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