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Technology Stocks : Internet Analysis - Discussion
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To: Reginald Middleton who wrote (123)2/7/1999 11:43:00 PM
From: BGR  Read Replies (2) of 419
 
Reginald,

From the investors perspective, you could actually be overstating or understating the risk premium by adding components to it that are not truly considered risky, such as the probability that MSFT will spike up sharply 4 times over the next year, driving up its volatility. That is understandably characterized as reward by long investors, and not risk. A downward spike is a "risky" occurence.

Perhaps the nomenclature is the problem here, as common usage seldom refers to upside risk which is encompassed in the volatility measure. However, if you look at the other side of risk - something that investors require compensation for - the concept of upside risk, while unintuitive, will probably make more sense (at least it does to me). Imagine two securities both of which are predicted go up 100% a year, and none of which have any downside risk (i.e. they never go down, and this is guaranteed) but one is predicted to go up at a continually compounded daily rate and the other at 4 steps of equally distributed rates. Most investors will probably prefer the first over the second. Hence upside risk which implies volatility is an undesirable feature (may be not in today's market as I have heard certain firends of mine claim that they trade to get a volatility fix, even though they usually lose money; and I have often done the same myself - but today's market is abnormal by most historical measures because of liquidity and general US financial market stability in the backdrop of world turmoil) and requires a premium.

-Apratim.
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