When one says “riskier assets should have higher expected returns than less risky assets”, one imagines comparing two assets that cost the same because the demand for them is the same.
“Relative gains” means gains relative to everyone else.
(I don’t have any substantial comments to make; I’m just closing the language barrier.)
When one says “riskier assets should have higher expected returns than less risky assets”, one imagines comparing two assets that cost the same because the demand for them is the same.
Not sure if you’ll remember what you meant 10 years ago, but… what did you mean by “cost the same”?
When you compare the returns you’re normalizing by the number of dollars put in, so you’re not comparing one share price directly to another or something like that. And if you measure cost relative to assets, or present value of expected future profits, then the claim is that they do not cost the same—that the riskier asset costs less.
I guess if you think of cost as compared to risk-adjusted return, then yes you’re expecting them to cost the same in those terms (and that’s why the riskier asset with the same expected return costs less in nominal terms). Is that what was meant, or something else?
“If you have two assets with the same per-share price, and asset A’s value per share has a higher variance than asset B’s value per share, then asset A’s per-share value must have a higher expectation than asset B’s per-share value.”
I guess I was using “cost” to mean “price” and “return” to mean “discounted value or earnings or profit”.
Things I learned from this post:
When one says “riskier assets should have higher expected returns than less risky assets”, one imagines comparing two assets that cost the same because the demand for them is the same.
“Relative gains” means gains relative to everyone else.
(I don’t have any substantial comments to make; I’m just closing the language barrier.)
Not sure if you’ll remember what you meant 10 years ago, but… what did you mean by “cost the same”?
When you compare the returns you’re normalizing by the number of dollars put in, so you’re not comparing one share price directly to another or something like that. And if you measure cost relative to assets, or present value of expected future profits, then the claim is that they do not cost the same—that the riskier asset costs less.
I guess if you think of cost as compared to risk-adjusted return, then yes you’re expecting them to cost the same in those terms (and that’s why the riskier asset with the same expected return costs less in nominal terms). Is that what was meant, or something else?
Hm, I think all I meant was:
“If you have two assets with the same per-share price, and asset A’s value per share has a higher variance than asset B’s value per share, then asset A’s per-share value must have a higher expectation than asset B’s per-share value.”
I guess I was using “cost” to mean “price” and “return” to mean “discounted value or earnings or profit”.