Hi John
I am slightly confused by the CAPM calculation in this question, the beta is 1.2, the yield on short term government debt is 4.5% and equity risk premium is 5%:
I would calculate this using the formula from the sheet - E(ri)=Rf+Bi(E(rm)-Rf)
E(ri) - 4.5+(1.2(5-4.5))
E(ri) = 6.9%
but the answer ignores the second Rf
it is 4.5+(1.2*5) = 10.5%
Where am I going wrong?
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CAPM Past Exam Q - Rupab
risk premium is Rf-Rm ,
E=Rf+B*Rp
13y ago#2Sylwia is correct.
If the question had said that the market equity return was 5% then your answer would have been correct. However if the exam uses the term 'equity risk premium' then they are already telling you the extra above the risk free rate (so in this question the actual market equity return would be 4.5% + 5% = 9.5%)
Great thanks!! :)
13y ago#4You are welcome :-)
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