<But what you are essentially doing is estimating the return you feel confident in expecting given your perception of the risk - not the value of the actual return. And this is inconsistent with your earlier assertion that we are saying the same thing, that the individual's opportunity cost reflects the other instruments available to that individual. Which may well be independent of bonds, stocks, etc.>
Regardless of what the asset classification is, it can be campared to the risk free rate since the RFR is the lowest common denominator in asset valuation. So no matter what instrument is available to you, you will end up comparing it to the risk free rate if you want an empirical valuation.
Risk quantification is nearly an exact science. The cost of capital = discuonting rate = oppurtunity cost of not investing in a risk free asset of MSFT is 11.1%. This is derived by taking the current 20 yr. bond yield and adding a premium to it which compensates for the additional risk of whatever instrument is not risk free. In the case of MSFT, you take the cost of debt, which is the market yield less the tax shield afforded to the corporate entity (MSFT has no material debt, thus this would equal zero) and add to it the cost of equity capital. This is calulated by taking the 20 yr bond and adding to it the historcal riosk premium of the broad market, which is just under 6%. This risk premium must be adjusted for MSFT's inidividual business risk (the risk fo MSFT in while conducting day to day business). The business risk index for MSFT is derived from its unleveraged beta (that is the standard deviation from the broad market in terms of volatility after taking into consideration the deletion of debt, since debt was already taking into consideration earlier on in the equation). This is how one empirically determines oppurtunity cost, discounting rates, and risk. Your method is subjective, and not empirical, thus lends itself to inconsistency as you use it to value different assets. It also does not take into account all of the risks that a company's funding sources subject an investor to, is quite susceptible to understatement, tempting one to think that they are doing better than they are.
RCM
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