Surely if a certain future payoff is expected a priori to be good (because of expected favorable business climate or whatever), then the price paid will adjust accordingly. This means that expected return (a function of price paid and payoff) will be comparable to other investments with similar payoffs, rather than being good.
If, say, business climate were unfavorable, and payoff is expected to be low, price paid for the investment should adjust for this so that expected return need not be low.
If there is large degree of uncertainty associated with a payoff, then expected return may be high to reflect the low price one might get due to people’s distaste for variance. (The expected return may be low though if people have a taste for variance; e.g. lottery tickets.)
The point is that expected good economic conditions per se need not be the driver of a priori expected returns. (That they are expected means that the price adjusts to reflect this, leading to mediocre returns.) Rather, the higher order moments of the (subjective) payoff probability distribution may play a more important role.
Surely if a certain future payoff is expected a priori to be good (because of expected favorable business climate or whatever), then the price paid will adjust accordingly. This means that expected return (a function of price paid and payoff) will be comparable to other investments with similar payoffs, rather than being good.
If, say, business climate were unfavorable, and payoff is expected to be low, price paid for the investment should adjust for this so that expected return need not be low.
If there is large degree of uncertainty associated with a payoff, then expected return may be high to reflect the low price one might get due to people’s distaste for variance. (The expected return may be low though if people have a taste for variance; e.g. lottery tickets.)
The point is that expected good economic conditions per se need not be the driver of a priori expected returns. (That they are expected means that the price adjusts to reflect this, leading to mediocre returns.) Rather, the higher order moments of the (subjective) payoff probability distribution may play a more important role.