Another method for valuing future returns is
to focus on the volatility of the expected return
and adjust the discount rate to account
for this volatility. (In this way the discount
rate compensates for two financial elements 
volatility risk and time value
of money.) In our example, if we concluded that
our investment has similar risks to a oneyear
investment offering a 9.8% return, we could compute
our investment's present value:
Return 
Probability 
Expected return 
Present value 
$5 
33.33% 
$1.67 

$12 
33.33% 
$4.00 

$20 
33.33% 
$6.67 


Total 
$12.33 
$11.75/(1+.098)
= $10.70 
But this method depends on determining the return
on "similar" investments. And to be
precise we should figure out the comparable return
(discount rate) for returns of different future
periods. That is, there may be a different discount
rate for expected returns in five years, compared
to those in one year.

Riskfree Return
The discount rate you choose in
computing the present value of an expected future
return compensates for multiple factors:
