COMPOUNDING RISK OVER TIME: A NOTE

The widely used risk-adjusted discount rate technique of investment evaluation has long been believed to be strictly appropriate only for projects whose risk increased with time. The "certainty equivalent proof" of that belief has recently been refuted. This paper attempts to demonstrate that the other proof of that belief, called the "compounding the risk premium" approach, is also flawed since it confuses the level of investment and the rate earned on investment.