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Sir,
When calculating CAPM, I’ve seen that sometimes we do not subtract risk free rate from the market rate, why is that? (I wasn’t sure on this in paper FM too)
As per the formula :
R(rf) + asset beta x ( ( Rm – (Rrf))We should subtract risk free rate from market rate everytime yes?
Regards
Yes, we always subtract the risk free rate from the market return.
However I think that you may have misread some of the questions you have seen in that sometimes instead of giving the market return they give the market premium. The market premium is the excess of the market return over the risk free rate (and so you do not then subtract the risk free rate again !!).
This happens more in the FM exam than in the AFM exam, but I do explain it in my free lectures.
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