Certainty Equivalent


Certainty Equivalent

A guaranteed return that someone would accept, rather than taking a chance on a higher, but uncertain, return. If you've ever thought about leaving your job to start your own business, and potentially make more money, but decided to stay and continue drawing a salary instead, then the amount of your salary is your certainty equivalent. You might need to come up with a business idea with a higher potential payoff to be convinced to leave the security of your existing job.

Investments must pay a risk premium to compensate investors for the possibility that they may not get their money back. If an investor has a choice between a U.S. government bond paying 3% interest and a corporate bond paying 8% interest, and he chooses the government bond, the payoff is the certainty equivalent. The company would need to offer this particular investor a potential return of more than 8% on its bonds, to convince him to buy. Thus, a company seeking investors can use the certainty equivalent as a basis for determining how much more it needs to pay, to convince investors to consider the riskier option. The certainty equivalent will vary, because each investor has a unique risk tolerance.


Investment dictionary. . 2012.

Look at other dictionaries:

  • Certainty equivalent — An amount that would be accepted in lieu of a chance at a possible higher, but uncertain, amount. The New York Times Financial Glossary …   Financial and business terms

  • certainty equivalent — An amount that would be accepted today (risk free) in lieu of a chance to receive a possibly higher, but uncertain, amount. Bloomberg Financial Dictionary …   Financial and business terms

  • certainty equivalent method — In capital budgeting, a method of risk analysis in which a particularly risky return is expressed in terms of the risk free rate of return that would be its equivalent …   Accounting dictionary

  • certainty equivalent method — In capital budgeting, a method of risk analysis in which a particularly risky return is expressed in terms of the risk free rate of return that would be its equivalent …   Big dictionary of business and management

  • Certainty Equivalent Return — The certain ( zero risk) return an investor would trade for a given (larger) return with an associated risk. For example, a particular investor might trade an uncertain expected 4% active return with 6% risk, for a certain active return of 1.5%.… …   Financial and business terms

  • certainty — certainty, certitude, assurance, conviction are comparable when denoting a state of mind in which one is free from doubt. Certainty and certitude both imply the absence of all doubt as to the truth of something; they are not always… …   New Dictionary of Synonyms

  • proof to a moral certainty — The equivalent of proof beyond a reasonable doubt, signifying such proof as satisfies the judgment and conscience of the jury, as reasonable men, that the defendant is guilty of the crime charged. 30 Am J2d Ev § 1171 …   Ballentine's law dictionary

  • Эквивалентная безрисковая доходность — (CERTAINTY EQUIVALENT RETURN) доходность по безрисковому вложению, при котором это вложение имеет для инвестора такую же привлекательность, как и рассматриваемая рисковая инвестиция …   Финансовый глоссарий

  • Risk aversion — is a concept in psychology, economics, and finance, based on the behavior of humans (especially consumers and investors) while exposed to uncertainty. Risk aversion is the reluctance of a person to accept a bargain with an uncertain payoff rather …   Wikipedia

  • Risk premium — A risk premium is the minimum amount of money by which the expected return on a risky asset must exceed the known return on a risk free asset, in order to induce an individual to hold the risky asset rather than the risk free asset. Thus it is… …   Wikipedia


Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”

We are using cookies for the best presentation of our site. Continuing to use this site, you agree with this.