The stochastic discount factor, often abbreviated as (SDF) is a concept in mathematical finance whereby the discounting of future cashflows,
is by the stochastic factor,
as opposed to the WACC of traditional DCF Valuation.
The following sequence is representative of the relationship between initial price inputs and payoff output values of and , respectively
implying
If the assets comprise a portfolio, then SDF rationalizes
The covariances standard identity presents
If a risk free asset, then 
signifies
Inserting this into the preceding equation produces the following formula for the risk of any portfolio or asset with the return
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