Discounting under Uncertainty
Eugene F. Fama
University of Chicago - Finance
J. OF BUSINESS, Vol. 69 No. 4, October 1996
Suppose asset pricing is governed by the CAPM or the ICAPM, and the expected one-period simple returns on the net cash flows (NCFs) of investment projects are constant through time. Then the NCFs are priced by discounting their expected values with their expected one-period simple returns. But when NCFs are priced by discounting their expected values with constant CAPM or ICAPM expected one-period simple returns, distributions of NCFs more than one period ahead are likely to be skewed right. Expected payoffs are then larger than median payoffs, and expected payoffs are progressively more unusual outcomes for longer investment horizons.
JEL Classification: G12
Date posted: December 18, 1996
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