Artikel
Which is the Correct Discount Rate? Arithmetic Versus Geometric Mean
The paper revisits the two major concepts for average historical returns, i.?e., the arithmetic mean and the geometric mean, in order to clarify which approach must be used for which application. Conducting a rigorous derivation with a geometric Brownian motion, we can explain that the appropriate discount rate refers to the mean discrete return and, therefore, to the arithmetic mean rather than the often wrongly applied geometric mean. Likewise, the prominent CAPM relationship between the expected asset return and the expected market return is only valid for the arithmetic mean rather than the geometric mean. Using historical data for the German stock index, we illustrate that an inconsistent application can cause severe deviations from the meaningful ex-ante expected performance of an asset, the true discount rate, the true CAPM risk-adjusted return, and the intended performance scenarios of packaged retail and insurance-based investment products (PRIIPs) within the key information documents (KIDs).
- Sprache
-
Englisch
- Erschienen in
-
Journal: Credit and Capital Markets – Kredit und Kapital ; ISSN: 2199-1235 ; Volume: 53 ; Year: 2020 ; Issue: 3 ; Pages: 355-381
- Klassifikation
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Wirtschaft
Asset Pricing; Trading Volume; Bond Interest Rates
- Thema
-
Asset returns
Arithmetic mean
Geometric mean
Geometric Brownian Motion
Discount rate
CAPM
PRIIPs
- Ereignis
-
Geistige Schöpfung
- (wer)
-
Kipp, Martin
Koziol, Christian
- Ereignis
-
Veröffentlichung
- (wer)
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Duncker & Humblot
- (wo)
-
Berlin
- (wann)
-
2020
- DOI
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doi:10.3790/ccm.53.3.355
- Letzte Aktualisierung
-
10.03.2025, 11:44 MEZ
Datenpartner
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Objekttyp
- Artikel
Beteiligte
- Kipp, Martin
- Koziol, Christian
- Duncker & Humblot
Entstanden
- 2020
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