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Discounting Under Uncertainty
Eugene F. Fama
The Journal of Business
Vol. 69, No. 4 (Oct., 1996), pp. 415-428
Published by: The University of Chicago Press
Stable URL: http://www.jstor.org/stable/2353402
Page Count: 14
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Suppose asset pricing is governed by the CAPM or the ICAPM, and the expected 1-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 1-period simple returns. But when NCFs are priced by discounting their expected values with constant CAPM or ICAPM expected 1-period simple returns, distributions of NCFs more than 1 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.
The Journal of Business © 1996 The University of Chicago Press