Publication Date:
1994-02-01
Description:
One of the most common ways to account for investment risk is to add a risk premium to the risk-free discount rate when computing present values of expected revenues which are uncertain. Using certainty-equivalent analysis, we show that the correct risk premium for short-term investments can easily be in the commonly used 7-percentage-point range. But for such risk premiums to be appropriate for long-term forestry investments, the necessary certainty-equivalent conditions often seem to be unreasonably restrictive. Results suggest that the appropriate risk premium may decline with lengthening payoff period for many forest investments. Limited empirical data provide tentative support, but more research is needed to resolve the issue. We review policy implications and suggest areas for further research.
Print ISSN:
0045-5067
Electronic ISSN:
1208-6037
Topics:
Agriculture, Forestry, Horticulture, Fishery, Domestic Science, Nutrition
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