Spring 07 #34

[d1nonlymurt]

This is a problem where we use a certain procedure from McDonalds text to get expected return.

I remembered the procedure and everything, but when reiewthing this problem, i dont understand why when we are calculating expected return we add E(alpha) + E(sigma)^2/2.

Since Expected value of a stock is e^(alpha - delta) which is this problem is e^alpha... shouldn't the answer just be E(alpha)?

please help!

[EaglesFan]

Originally Posted by d1nonlymurt

This is a problem where we use a certain procedure from McDonalds text to get expected return.

I remembered the procedure and everything, but when reiewthing this problem, i dont understand why when we are calculating expected return we add E(alpha) + E(sigma)^2/2.

Since Expected value of a stock is e^(alpha - delta) which is this problem is e^alpha... shouldn't the answer just be E(alpha)?

please help!

As I understand it, you're adding E(sigma)^2/2 to E (mu) and the two together = E (alpha).

[d1nonlymurt]

ohhhhhh. i get it now. thanks, that cleared it up!