Real Options

28.7
Estimating the Market Price of
of
Risk (equation 28.7, page 665)
The market price of risk of a variable is given by
ρ
λ = ( µ
m
− r)
σ
where ρ is the instantaneous correlation
between percentage changes in variable
and returns on the market; σ
the market's return; µ
m
is the volatility
is the expected
return on the market; and r is the short - term
risk - free rate
m
m
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull