Talk:Risk premium
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Stray comment (section heading added 2/26/2012)
[edit]There 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
[edit]I 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
[edit]MARR is normally expressed as a percentage, correct? cds, 7 march 2007
CEQ
[edit]I 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
[edit]I 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
[edit]While 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.
Economicsgirl (talk) 13:44, 19 March 2010 (UTC)
Math Style
[edit]Wikipedia: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)
DavidMCEddy (talk) 21:33, 28 April 2021 (UTC)
Plenty of citations now
[edit]Do 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)