2012/01/02 by Jack L. Treynor · 3 citations
Economics, Econometrics and Finance · #Actuarial science #Business #Capital (architecture) #Capital asset pricing model #Capital market line #Cash flow #Economics #Expected return #Finance #Financial Markets and Investment Strategies #Financial economics #Investment (military) #Market portfolio #Modern portfolio theory #Portfolio #Position (finance) #Rate of return #Risk premium #Security market line #Stock market #Value (mathematics) #Value premium
paper · doi:10.1002/9781119196679.ch6
openalex publication_date 2012/01/02 · openalex created_date 2016/08/23 · openalex updated_date 2026/07/29
This chapter addresses the theory of market value that incorporates risk, considering a highly idealized model of a capital market in which it is relatively easy to see how risk premiums implicit in present share prices are related to the portfolio decisions of individual investors. Investors may differ, depending on their capital and attitudes toward risk, in the absolute amount of the dominant combination of risky investments they undertake, but if their (probabilistic) forecasts of future value agree, then the proportionate composition of the risky assets must be the same. Unless he hoards cash, the investor will receive a return on his capital at the risk-free lending rate no matter how he invests his money, plus a risk premium, the expected value of which depends only on the risk premium for the respective investments and the position he elects to hold in each. The risk-premium concept is thus a useful one for talking about the portfolio problem under the assumptions, since, together with the uncertainty associated with a given investment, it is the relevant investment parameter.