Certainty Equivalent Method

Question 1

CE(C) =

Answer 1

E(C) - b(Rm - Rf)

**MINUS BETA

Question 2

b=

Answer 2

Cov( Rm, C)/var(Rm)

Question 3

Cov(Rm, C) =

Answer 3

Standard deviation (Rm) x Standard deviation (C) x r

• given probabilities you weight the variance and covariance for each, then sum
• given probabilities, Cov = (probability)(Rm - avgRm) (CF - avgCF)

Question 4

Var(Rm)

Answer 4

Standard deviation^2

*given probabilities, = (probability)(Rm - avgRm)^2
* Then sum

Question 5

NPV =

Answer 5

PV - cost

Question 6

Perpetual growth

Answer 6

PV = CE(CF) / rf - g

Question 7

One time period or Not perpetual growth

Answer 7

PV = CE(CF) / 1+ rf