Risk Premia: Certainty Equivalents vs Risk-Adjusted Discount Rates
- Date: 05/25/2010
Calgary Place Tower (Shell)
Current capital budgeting and valuation practice commonly adjusts for risk by increasing the discount rate with a risk premium. We will show that the CAPM beta that determines the risk premium is levered and hence a random quantity, resulting in valuation errors. It is possible to calculate appropriate risk premia for a certainty equivalent approach that adjusts the numerator of the present-value formula in such a way that it is not random. We will show how these risk premia can be calculated and that, in fact, they are impounded in the modern formulae for valuing derivatives.
12:00-1:00pm Calgary Place Tower 1 (330 5th Avenue SW), Room 1116 and 1118
Sign-up deadline: Monday, May 19th, 2010
The Pacific Institute for the Mathematical
Sciences is grateful for the support of Shell Canada Limited, Alberta
Advanced Education and Technology, and the University of Calgary for
their support of this series of lectures.