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Discounting Under Uncertainty

Eugene F. Fama
The Journal of Business
Vol. 69, No. 4 (Oct., 1996), pp. 415-428
Stable URL: http://www.jstor.org/stable/2353402
Page Count: 14
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Discounting Under Uncertainty
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Abstract

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.

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