Hi Andy,
I'll give it a go but I would appreciate any comments people may have!
From my understanding of MCEV, the key idea is that returns are realised when earned and not before! (This was a problem with traditional embedded value because companies could do just that, which is not prudent!
Strictly speaking, the higher expected return earned on riskier assets isn't ignored. Under MCEV it is discounted at this higher return (i.e. there is no impact).
The implication of this is that the riskiness inherent in cashflows should be discounted at higher rates of interest to take account of their riskiness.
The rationale behind using risk free rates is to simplify the calculation! It borrows the ideas touched in CT8 around risk neutrality.
Under certain conditions... we can produce results in which the real world measure and the risk neutral measure produce identical results
In answer to your final question:
You are right... the investment strategy should have no impact on an MCEV calculation.
What it would effect however would be the implied discount rates that many companies would calculate when presenting their results.
This is my interpretation of MCEV but would welcome any views on this.
This is what I have picked up reading around and not from the course I must add!!
Hope this helps
Last edited: Jun 17, 2010