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Risk and Return
Published in Bijan Vasigh, Ken Fleming, Liam Mackay, Foundations of Airline Finance, 2018
Bijan Vasigh, Ken Fleming, Liam Mackay
Risk-neutral investor is an investor who does not consider the underlying risk when making an investment decision. To a risk-neutral investor, risk is implicit in every investment and therefore should not be the discerning factor when making a decision. Risk-neutral investors will typically focus much of their attention on expected returns as opposed to analyzing potential factors that could result in losses. Many individuals likely fall into the category of risk neutral, believing that the underlying factors of a company stock will spur positive gains, as opposed to the issues that could cripple the company.
Risk, Insurance, and Bonds
Published in Willie Tan, Principles of Project and Infrastructure Finance, 2007
An investor is said to be risk neutral if only the expected project returns matter, that is, the variance of the return (or risk) is neglected. Being indifferent to risk, or risk neutrality, is not a plausible assumption. Hence, Equation (10.4), which only considers expected returns or utilities, must be further modified to take into account risk.
DNPV: a valuation methodology for infrastructure and Capital investments consistent with prospect theory
Published in Construction Management and Economics, 2020
David Espinoza, Javier Rojo, Arturo Cifuentes, Jeremy Morris
To link investors’ risk preferences to cashflow risk profiles, the concept of “Risk Neutrality Level” is introduced herein and it is defined as the level of risk an investor would be willing to accept to take on a given investment (gamble) with a known PDF. Investors that accept the value of the expected revenues/expenditures without requiring compensation for taking on risks associated with their uncertainty (Figure 2a) are defined as Risk Neutral Level 0 (or simply risk neutral) investors. The next level (Risk Neutral Level I) refers to those investors who are loss-averse and consider as appropriate compensation for the risk they are bearing (i.e., they are risk neutral with respect to the downside).5 The cost of risk concept coupled with the Risk Neutrality Level can be useful to benchmark how risk averse an investor is, particularly when dealing with non-market risks. Investors can set objective targets for risks that they are unfamiliar with or are lacking data, or that they simply cannot afford. Furthermore, because most individuals are familiar with the notion of insurance, investors should find the cost of risk concept a relatively easy way of capturing the riskiness of cashflows.
Expansion planning for transmission network under demand uncertainty: A real options framework
Published in The Engineering Economist, 2018
Fikri Kucuksayacigil, K. Jo Min
In the binomial lattice calculations, risk has to be included in the equations. Mun (2002) stated that cash flows including risk must be adjusted so that risk can be represented. According to Mun (2002), there exist two methods for doing this: (i) cash flows are calculated by utilizing the risk-adjusted discount rate or (ii) probabilities of the cash flows are adjusted with risk and discount of cash flows is performed with risk-free discount rate. Though original (or true) probabilities are taken into account in calculations for (i), risk-neutral probabilities are considered in calculations for (ii). The methods defined in (ii) are preferred in real options analysis because it is expressed that calculating different risk-adjusted discount rates in various states through the binomial lattice is avoided in this case. The following simple example depicted in Figure 2 (see Mun 2002) explains how risk-neutral probability is obtained.
Modeling optimal thresholds for minimum traffic guarantee in public–private partnership (PPP) highway projects
Published in The Engineering Economist, 2022
Zhenyao Wu, Shinya Hanaoka, Bin Shuai
A risk-neutral valuation is proposed under the assumption of a risk-neutral world. Valuing real options (the MTG and TC options) consists of two steps: first, the traffic growth rate in Eq.(1) needs to be reduced from to where is the risk premium of traffic demand risk, and then the cash flow needs to be discounted with The use of Eq. (6) to estimate has been justified by Ashuri et al. (2012).