5 ms·

It shouldnt be exactly neutral, it should be risk adjusted neutral.

• beagle3 13y ago
  An, but "risk adjusted" assumes a specific risk model, and there isn't one that's universally applicable (not even a measure of risk). And without specifying these, inflation or profit neutral still make sense, and risk adjusted doesn't.
  • thatthatis 13y ago
    Not necessarily. Modern Portfolio Theory says that in stocks, even though the lack of universal risk model exists, the market still finds a way to price risk such that portfolios cannot get risk free returns just by diversifying. So, even without a standard risk model the market usually prices risk within a bound.
    • beagle3 13y ago
      Which is useless in the context of two options are equivalent under "risk equality" - the context of this discussion.
      • thatthatis 13y ago
        Why do you think a result within a bound is useless?
        • beagle3 13y ago
          Because the bound is unknown, and unspecified. I agree that the market tends to price some sort of risk. However, the discussion was "ownership vs rent", with the consensus beIng the cost should be equivalent under some measure; however, some expect it to be cashflow neutral, some inflation neutral, and some risk neutral. Of these, the first two can be quantified but the last cannot - and it is therefore not useful in the discussion of whether the prices make sense. After more than 100 years of discussion, there is still no consensus among economists over whether one should maximize expected value or expected logarithmic value. People often mention use "on a risk adjusted basis" without qualifying the adjustment - and that's a useless thing to do.