06-03-2009, 10:13 PM
Quote:In reality, even this simple case will have year to year variations. Some years expenses will be above average because equipment needs to be replaced, etc. Other years, expenses will be below average (everything is holding out for a while).
There is the problem. Investors should not *demand* any particular return. It is these, often unreasonable, demands that cause the problem.
--Pete
Investors should require a certain level of return.
Anyone can invest in treasuries which are widely viewed as risk free and earn a certain rate of return. Why would he accept a smaller return when more risk is involved? How is this unreasonable?
Taking this idea then applying statistical principles and arbitrage techniques (spot yields, put-call parity, bootstrapping, etc) we find ourselves in our current situation where investors demand a certain return on their money.