discounted expected value

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P= E (D)/(1+Rf)T
D is the random cash flow produced by new security.
Why this formula will overprice the security?

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关键词：Expected Discount Discou expect Count value Expected Discounted

what's the definition of Rf ? Typically the interest rate for the new security should be larger than the risk-free interest rate

I assumed that the interest rate is stochastic

Rf=Risk free return?

If Rf=Risk free return,it exclude risk premium,this would overprice the risky asset

nena2749 发表于 2009-11-18 20:34
Rf=Risk free return?

If Rf=Risk free return,it exclude risk premium,this would overprice the risky asset

right.

thank you , i got it .