One of the assumptions of CAPM is debt is risk free. But QN 25 on your mock it says CAPM debt does not assume debt is risk free (although we do normally assume it is risk free when using asset beta formula).

Please explain

From kaplan text “unrestricted borrowing or lending at the risk-free rate of interest”

Hello Sir I’ve been going through questions in the revision kit and in CAPM formula the risk free return is not being deducted from market risk in the formula. As a result I’m not sure as to which answers are correct. Please help me with this issue.

It is almost certainly because the questions you refer to give the market premium. The market premium is the market return less the risk free rate, so we do not subtract the risk free rate again 🙂 I do mention this in my free lectures.

Hello John sir, Just cannot hold myself from appreciating all your hard work for the students. Providing all these amazing resources at free of cost and on top of that explaining things with so much intent and hard work is an exceptional thing. I am almost halfway of my ACCA exams and it is all because of Open tuition and tutors like you. A massive respect and a big Thank You!

The MV is the PV of the future expected dividends discounted at the shareholders required return. If we know the MV and the expected future dividends then we can calculate what the current required rate of return is, which is what the previous formula does.It does not tell us why. shareholders are requiring that level of return.

The required return depends on the level of risk, and if we know the level of risk then the CAPM formula calculates the return that shareholders should be requiring.

First of all, Thank you very much for the great work you are doing for the community.

Sir i have a question that you said that systematic risk affect all the business. My question is how a small firm of accountants that only works locally is affected by systematic risk (or general economic factors like changes in level of inflation or changes in exchange rate).

Hello, first of all, thank You for the great lectures! I though I would share – I completed the chapter and did straight away the question part and I missed 3 out of 5 examples due to term “equity risk premium”. Now I of course found it and will remember but perhaps some comments can be added when/if doing the next update on either video lectures or lecture-notes. Thank You!

adaacca says

One of the assumptions of CAPM is debt is risk free. But QN 25 on your mock it says CAPM debt does not assume debt is risk free (although we do normally assume it is risk free when using asset beta formula).

Please explain

From kaplan text “unrestricted borrowing or lending at the risk-free rate of interest”

AkilaShaikh says

I really appreciate your response to my doubt sir.

Thank you

John Moffat says

You are welcome 🙂

AkilaShaikh says

Hello Sir

I’ve been going through questions in the revision kit and in CAPM formula the risk free return is not being deducted from market risk in the formula.

As a result I’m not sure as to which answers are correct.

Please help me with this issue.

John Moffat says

It is almost certainly because the questions you refer to give the market premium. The market premium is the market return less the risk free rate, so we do not subtract the risk free rate again 🙂

I do mention this in my free lectures.

AkilaShaikh says

I really appreciate your response to my doubt sir.

Thank you

John Moffat says

You are welcome 🙂

bhavikabatra99 says

Hello John sir,

Just cannot hold myself from appreciating all your hard work for the students. Providing all these amazing resources at free of cost and on top of that explaining things with so much intent and hard work is an exceptional thing. I am almost halfway of my ACCA exams and it is all because of Open tuition and tutors like you. A massive respect and a big Thank You!

John Moffat says

Thank you very much for your comment 🙂

JojoBeat says

Hi Sir, how does this differ from the required rate of return formula we learned from previous chapter? Is that formula risk free?

John Moffat says

Not at all.

The MV is the PV of the future expected dividends discounted at the shareholders required return. If we know the MV and the expected future dividends then we can calculate what the current required rate of return is, which is what the previous formula does.It does not tell us why. shareholders are requiring that level of return.

The required return depends on the level of risk, and if we know the level of risk then the CAPM formula calculates the return that shareholders should be requiring.

amjad says

Dear Sir,

First of all, Thank you very much for the great work you are doing for the community.

Sir i have a question that you said that systematic risk affect all the business. My question is how a small firm of accountants that only works locally is affected by systematic risk (or general economic factors like changes in level of inflation or changes in exchange rate).

MohamedH says

Thank you Very Much Sir

Alise says

Hello, first of all, thank You for the great lectures!

I though I would share – I completed the chapter and did straight away the question part and I missed 3 out of 5 examples due to term “equity risk premium”. Now I of course found it and will remember but perhaps some comments can be added when/if doing the next update on either video lectures or lecture-notes.

Thank You!

mmharis says

Hello Sir,

Sir in this situation (CAPM part b), Does calculation of market return and risk free rate is also out syllabus of FM?

mmharis says

is also out of syllabus of FM*