Creating portfolio risk and return models [29]

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Bullet points include: Possible difference in practice is distinction between real world and risk-neutral probability measures If value identified by weighting discounted value of outcome by probability of outcome is to be market-consistent then either: Probabilities must be adjusted to be risk-neutral, or Discounting must be adjusted, using state-specific ‘deflators’ Outside actuarial world (b) is rarely used Perhaps because few outside actuarial world are intellectually wedded to incorporating long-term outperformance of (say) equities, at least for the sorts of purposes for which they use such models

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