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Discounting under Uncertainty

J. OF BUSINESS, Vol. 69 No. 4, October 1996

Posted: 18 Dec 1996  

Eugene F. Fama

University of Chicago - Finance

Abstract

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

Suggested Citation

Fama, Eugene F., Discounting under Uncertainty. J. OF BUSINESS, Vol. 69 No. 4, October 1996. Available at SSRN: https://ssrn.com/abstract=8000

Eugene Fama (Contact Author)

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7282 (Phone)
773-702-9937 (Fax)

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