Bridge over ocean
1 November 1997 Financial Analysts Journal Volume 53, Issue 6

Put Prices and PEN Participation Rates at Longer Horizons: Is Equity Risk in the Eye of the Beholder?

  1. R. Douglas Van Eaton
  2. James A. Conover

Two recent articles in the Financial Analysts Journal address the question of how equity risk changes as investment horizons grow longer. Both use analyses based on derivatives-pricing examples but draw exactly opposite conclusions. We reexamine these authors' arguments and find the logic of both analyses is flawed. We demonstrate that the use of specialized put option prices as proxies for equity risk yields ambiguous conclusions about equity risk changes at longer investment horizons. With added information about an investor's required minimum rate of return, however, we can specify the change in equity risk at longer horizons with these put prices.

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