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CAPM

This topic has 1 reply, 2 voices, and was last updated 3 months ago by John Moffat.

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March 4, 2022 at 9:41 pm #649843
fiz90
- Topics: 10
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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
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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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