Suppose that we have a new security available for us to invest in, with a 1-year term to maturity. Let D be the random cash flow (assumed to be non negative) produced by this new security at the end of 1 year. Let Rf be the risk free interest rate and let E(Rm) be the expected return on the market portfolio.

Consider the following formulae for valuing the new security's cashflow ( EQ means compute expectation using the "risk neutral distribution", while E means the "real world" expectation).

(1) Discounted Expected Value Using the risk free rate P=[E(D)]/(1+Rf)

(2) Discounted Expected Value Using a risk adjusted rate (CAPM pricing ) P=[E(D)]/[(1+Rf)+(E(Rm-Rf)]

(3) Risk Neutral Pricing: P=[EQ(D)]/(1+Rf)]

Assuming that the new security has returns which are positively correlated with the market portfolio's returns,

Under what circumstances is it appropriate to use each of these formulae to value a security / cash flow?