tag:blogger.com,1999:blog-8152901575140311047.post3504279881045844413..comments2024-03-29T07:41:47.433-04:00Comments on Musings on Markets: What if nothing is risk free?Aswath Damodaranhttp://www.blogger.com/profile/12021594649672906878noreply@blogger.comBlogger11125tag:blogger.com,1999:blog-8152901575140311047.post-4455314831231143182013-11-21T15:07:39.965-05:002013-11-21T15:07:39.965-05:00Prof.
I have a question??
does risk free rate de...Prof.<br /><br />I have a question??<br /><br />does risk free rate depend on the home country of the investor. For eg in an US investor will invest in india use a different risk free rate as compared to an indian investor. <br /><br />Himanshu Kundoohttps://www.blogger.com/profile/06627655743706445728noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-47298075921928937192010-08-19T16:48:31.394-04:002010-08-19T16:48:31.394-04:00Hi,
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If there is no safe haven of treasuries in ...Prof:<br /><br />If there is no safe haven of treasuries in developed markets, then what exactly are we measuring. Presumably, all emerging markets are correlated to mature markets for funds. So can't we move forward by just revising our risk aversion. Like during the crisis of 2008, companies were trading below their intrinsic values, till date there is no clarity on the state of the economy, Investors have just raised their trading multiples. Accepting more risk for investments made. My whole point is if the most powerful nation's currency is not risk free, then the bar for risk has to go up and we start trading in a environment of higher market multiples for equities and ask for higher interest rates on bonds. I know i have linked a lot of variables, but the fact of life is the whole world for the next 10 years is dependant on US. Probably after a few years the authority of supreme power could be pushed to China. Here again the problem is China itself is dependant on US for most of its growth. So how do we trade from here if there is no safe haven, are we on the brink of worldwide collapse and then there is survival of the fittest?Unknownhttps://www.blogger.com/profile/02729991639029780923noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-46971398373831199612010-08-05T00:28:29.859-04:002010-08-05T00:28:29.859-04:00Dear Prof.-
As you correctly mentioned, the price...Dear Prof.-<br /><br />As you correctly mentioned, the price of an asset equals its real price plus the risk (volatility) associated with it. Hence with CDS gaining acceptance, the price of risky assets should come down. But has it been really the case, say in US, did the real asset prices fall as CDS got wider acceptance. I'm asking this as the RBI (India) is looking at introducing vanilla CDS of corp bonds for now, in a narrowed down, controlled manner. What's your view there. Thanks.NKhttps://www.blogger.com/profile/04333841781924962553noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-63290148711909577052010-07-28T14:17:08.672-04:002010-07-28T14:17:08.672-04:00You are right. What matters is not only no correla...You are right. What matters is not only no correlation with other risky assets, but also a guaranteed return. If the return is guaranteed, there should be no correlation with risky assets. Furthermore, there should also be no reinvestment risk -> use of spot rates.<br /><br />One thing I have to mention: thanks a lot for all your work you are sharing with us. You also have a great homepage with a lot of very helpful information!Michaelhttps://www.blogger.com/profile/04636573078660457053noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-52615381111711611062010-07-28T09:48:46.603-04:002010-07-28T09:48:46.603-04:00Most of the world (or at least emerging markets) h...Most of the world (or at least emerging markets) has operated with the assumption that governments can default and corporate finance is still practiced. You cannot suspend corporate finance, since that would mean that companies do not make new investments, set financing mixes or pay dividends. You can modify the theory and practice of corporate finance to allow for government default and that is what I have tried to do.Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-46247367651495267892010-07-28T09:39:27.165-04:002010-07-28T09:39:27.165-04:00Don't you think that default of the treasury w...Don't you think that default of the treasury would be such a catastrophic scenario that modern corporate finance would not be applied?Unknownhttps://www.blogger.com/profile/09055483147110404901noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-57097026384112817882010-07-28T06:48:46.653-04:002010-07-28T06:48:46.653-04:00First, in response to the comment that all you nee...First, in response to the comment that all you need is a zero beta asset for a risk free investment. That is not true and here is why. A lottery is a zero beta investment; it's payoff is unccorrelated with the market but it is definitely not riskfree. On the question of gold, I am conflicted. I think that the absence of a riskfree investment will send investors in search of something guaranteed and gold has historically fulfilled that need.. So, that may explain the surge in gold prices.Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-60056273762216026802010-07-27T10:25:38.748-04:002010-07-27T10:25:38.748-04:00Great article - just finished reading the 55 pages...Great article - just finished reading the 55 pages. I discussed the death of the risk free rate in my blog recently - "R.I.P. Risk Free Rate" http://bit.ly/bYyJKh, but not nearly as in-depth and well thought out as you have.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-67817216803461469192010-07-25T15:56:55.272-04:002010-07-25T15:56:55.272-04:00Prof. -
1) would pure gold (or any other real as...Prof. - <br /><br />1) would pure gold (or any other real asset capable of holding its value and not susceptible to debasing / depreciation) be a risk free asset? <br /><br />Admittedly, it won't / mayn't yield anything. Would that also drive the expected returns down even though the investors will not lose their money?<br /><br />2) Also, doesn't the current practice of using yields on sovereign debt as a proxy of risk free rate implicitly admit pricing the default by sovereign? <br /><br />"Shouldn't" a true RF asset neither default nor is required to yield anything?<br /><br />The only "escape route" I could think of was the behavioral one - humans need incentive to save & hence, an RF may have to provide yield. <br /><br /><br />@Michael - Isn't a risk free asset one that when held till maturity (or end of investment period) will return the principal?<br /><br />If we agree on that definition, wouldn't intra-period market risk / interest rate risk / correlation risk etc. be meaningless?lucky_idiothttps://www.blogger.com/profile/13629787185722303447noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-50317088603774956012010-07-25T14:25:21.837-04:002010-07-25T14:25:21.837-04:00Risk free = no correlation to all other asset clas...Risk free = no correlation to all other asset classes, which means beta = 0. I have never thought that this assumption is true for government bonds -> my understanding is that government bonds are only proxies for risk free investments, because it is not possible (too expensive) to build a portfolio with a beta of 0. So, it has never been a problem that government bonds are not really risk free investments, but only proxies.Michaelhttps://www.blogger.com/profile/04636573078660457053noreply@blogger.com