Talk:Risk premium
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Stray comment (section heading added 2/26/2012)
editThere are two basic approaches to using an equity risk premium -- looking at the historic mean of risk (versus a riskless investment such as a Treasury Bill or Bond) or simply guessing at what the rate will be in the future based on recent market action.
Risk Premimum vs. Minimum risk premium
editI have noticed an error in this article's theme. There is a difference between risk premium and minimum acceptable risk premium. I think the minimum acceptable rate of return article is where we need to establish a context for the concept of a minimum risk premium, and I think references to minimum risk premiums probably should be minimized in this article. Any thoughts? Nova SS 21:51, 19 February 2006 (UTC)
MARR Units
editMARR is normally expressed as a percentage, correct? cds, 7 march 2007
CEQ
editI have seen the shortcut CEQ for Certainty Ecquivalent. Shouldn't wikipedia redirect to this page for someone searching for ceq, I mean: shouldn't we make a link in Council on Environmental Quality? Wojnarj (talk) 19:13, 13 June 2009 (UTC)
Explanation doesn't make sense to me
editI did not understand the explanation on the article page. It was explained in such a way that only a person who already understood the concept might understand the explanation. Either that, or the explanation is simply wrong. I think it should be explained in such a (simple)way that a person who comes looking for information can understand it, not a person who already knows the answer. —Preceding unsigned comment added by Allison14 (talk • contribs) 00:30, 3 November 2009 (UTC)
Terrible Explanation of Certainty Equivalent
editWhile technically correct, the explanation of the certainty equivalent is really unenlightening. Consider instead a summary of the discussion of the topic from Microeconomic Theory by Mas-Colell, Whinston, and Green:
Given a Bernoulli utility function u(⋅) (that is, one defined over certain amounts of money, as opposed to a von Neumann-Morgenstern utility function, which is defined over lotteries), the CERTAINTY EQUIVALENT, c(F,u), of a lottery F(⋅) is the certain amount of money for which the individual is indifferent between F(⋅) and the certain amount of money:
u(c(F,u))=∫u(x)dF(x)
Notice that the right-hand side of the equation is simply the mathematical expectation, over the realizations of x, of the values of u(x).
Let's take a specific example. Let the Bernoulli utility function be:
u(x)=x1/2
where x≥0 is a dollar value. Suppose the proposed lottery is a 20% chance of winning $40 and an 80% chance of winning $8. Using the definition above and simplifying notation,
u(c(F,u))=E(u(F(⋅)))
or
[c(F,u)]1/2=0.2*($40)1/2+0.8*($8)1/2
[c(F,u)]1/2=3.53
c(F,u)=$12.44
Notice that the utility of the expected value of the lottery is
u(E(F(⋅)))=[0.2*($40)+0.8*($8)]1/2=3.79
Since u(E(F(⋅)))>E(u(F(⋅))), the agent is risk averse.
Again, the interpretation of c(F,u) is that the agent is INDIFFERENT between choosing the lottery described above and taking $12.44 with certainty.
Math Style
editWikipedia:Manual of Style/Mathematics#Roman versus italics says, "For single-letter variables, constants, and operators ..., Wikipedia articles usually use an italic font." On 2021-04-28 this article included the following that violates this:
The following reference was included for this formula:
- McClure, Ben. "Explaining The Capital Asset Pricing Model (CAPM)". Investopedia. Retrieved 2020-11-01.
That reference gives this formula with single letter variables with subscripts, consistent with the "Roman versus italics" section in the Wikipedia:Manual of Style/Mathematics.
The version of the formula in this article uses words NOT single-letter variables. Therefore, I've changed this to the following:
- CAPM = (The Risk Free Rate) +
- (The Beta of the Security) * (The Market Risk Premium)
Plenty of citations now
editDo we still need the banner that says this article needs more citations? There are over 20 now. Cordially, BuzzWeiser196 (talk) 13:58, 15 January 2022 (UTC)