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Liquidity risk premium in costing of equity capital
Return-on-equity (R-o-E) is a broadly adopted financial performance measure used to comparatively assess financial returns on equity deployed, providing a consistent revenue measure across different risk enterprises. This paper reviews some of the assumptions inherent in modern financial theory which underlie the use of R-o-E metrics. One key to such an hypothesis is an assumed ergodic behaviour of the risk enterprise. A failure of ergodic behaviour to hold leads to a required adjustment to the R-o-E metric in order to circumvent pro-cyclical risk consequences.
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CitationEditorial Board Member, (2010, December 1). Liquidity risk premium in costing of equity capital. In the Journal of Risk Management in Financial Institutions, Volume 4, Issue 1.