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CAPM

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › CAPM

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  • March 4, 2022 at 9:41 pm #649843
    fiz90
    Member
    • Topics: 10
    • Replies: 14
    • ☆

    Hi Sir

    i noticed in the BPP revision kit when calculating the cost of equity using CAPM they do not deduct the risk free rate from the market premium. For e.g. Q 57 to establish the cost of equity they simply do 3.8 1.2 x 7 = 12.2. Whereas I calculate by deducting 3.8 from 7 giving me a completely different cost of equity. Please advise.

    Thanks

    March 5, 2022 at 7:58 am #649861
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    It depends whether the question gives the market return or the market risk premium.

    The formula has the market return less the risk free rate, and this difference is also known as the market risk premium.

    I do explain this in my free lectures on CAPM.

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