Response to Comment on the Albrecht Review of the Three Arguments Used to Justify Including A Risk-Premium in the Discount Factor
Gary Albrecht. (2013). Response to Comment on the Albrecht Review of the Three Arguments Used to Justify Including A Risk-Premium in the Discount Factor. Journal of Legal Economics 19(2): pp. 25-26.
As stated in the comment, my conclusion is that the…”example illustrates that an award calculated with a discount rate that contains a risk premium does not necessarily provide a sufficient amount to replace the expected loss even though the realized returns on the investment vehicle are equal to the expected return over the given time frame.” (Albrecht p.10; Linke p. 1 & 3.) Mr. Linke follows this with stating that “His conclusion understated the insight provided by his example. The Albrecht example reveals that variability in the expected year-by-year return stream can cause the estimated present value (i.e., $73,601 in the example) to be either too large or too small.” (Linke p. 3.) I certainly agree with Mr. Linke’s statement. (Note that “variability” is referring to actual return being different than the expected return, i.e., the inclusion of risk, and not that a certain return has to be equal in all periods.)
Earnings, Interest discount rates, Interest rates, Misc-Not classified