7. Risky Ventures: Assessing the Price of Risk
Most investments and assets that we are called on to value have some or a great deal of risk embedded in them. While part of the challenge in valuing a business is assessing the risk in that business, it is just as important that we estimate the price the market is demanding for taking this risk. The former is specific to individual assets, and the latter is a more general assessment that affects how we value all assets.
This chapter considers two inputs that affect every valuation. The first is the equity risk premium—the premium that investors demand for investing in the average-risk equity investment. The second is default spreads, which lenders charge as premiums over the risk-free rate for ...
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