Actuarial Outpost Spring 07 #34
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#1
05-13-2009, 02:01 PM
 d1nonlymurt Member Join Date: Jan 2009 Posts: 47
Spring 07 #34

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)?

#2
05-13-2009, 02:46 PM
 EaglesFan Member Join Date: Nov 2005 Posts: 1,540

Quote:
 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).
#3
05-13-2009, 03:10 PM
 d1nonlymurt Member Join Date: Jan 2009 Posts: 47

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

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