The nature of capital and income

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Monograph

Identifikator:: 1838857176

URN:: urn:nbn:de:zbw-retromon-229226

Document type:: Monograph

Title:: Thomson's manual of Pacific Northwest finance

Place of publication:: Seattle

Publisher:: Thomson's Statistical Service

Year of publication:: 1930

Scope:: XXX, 487 Seiten

Digitisation:: 2022

Collection:: Economics Books

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Document type:: Monograph

Structure type:: Chapter

Title:: Section VIII. Industrials

Collection:: Economics Books

406 NATURE OF CAPITAL AND INCOME case of such high risk we cannot, therefore, apply the simple rule of adding to the rate of interest the rate of risk to obtain the “mathematical value”; and the “commercial value” would, of course, be even less than the mathematical value. In other words, it is practically impossible to compensate for a risky investment by increasing the rate of interest as though it were an insurance premium. In actual practice such a “bond” would be absolutely worthless; for, while the above calculations are correct on the basis of a chance of payment of one in ten, practically this chance of payment would be zero. The high risk not only makes the terms of the loan onerous, but these onerous terms make the uncertainty of repayment greater, and so on in a vicious circle. A lender who fancies he can offset a risk as high as 1% by lending only 50 cents instead of $100 for a returnable principal of $100; will find that he has not offset that risk, but merely increased it. In the previous calculations, we assumed that a default in one payment carried with it a default in all subsequent pay- ments. We may, however, easily extend our formula to the general case by designating the chances of payment in succes- sive years, whether interdependent or not, by p, for the first year, p, for the second (instead of by p, p, as before), p; for the third, etc., and changing the first equation on page 404 accord- ingly. § 3 (To Cu. XVI, § 10) Variability about a Mean, as measured by the ‘‘Standard Deviation * For a more minute analysis of the bearing of chance it is preferable to measure the variability with reference to the mean. Thus, in the case mentioned, where the dividends are successively 5%, 5%, 6%, 5%, 5%, 4%; 5%; T%; 5%, 3%; 49%, 5%, instead of measuring the variability of dividends with reference to 59, we should measure it with reference to the mean rate, which is 4.99,. The deviations from this mean during the twelve successive years were therefore: + 0.1, +01, +11, +01, +01, —09, 40.1, +21, +01, —1.9, —0.9, +0.1.

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