Calculating cost of equity by CAPM

[Flashback]

Nassim Nicholas Taleb: “The Black Swan: The Impact of the Highly Improbable”, recommended reading.

[cfa_010203]

@Harrogath

In the “Western” topic test question #2 it is required to calculate the required return on equity using Fama-French model, not the CAPM. I must tell you that FF model uses short-term risk free rate because the researchers who created the model (Eugene Fama and Kenneth French) found useful using short-term risk free rate in their study to explain returns on equity.

This is the only model that uses short-term RF rate, memorize it!

PD: CAPM should use long-term risk-free rates.

I see! Thanks Harrogath for clarifying this. So it goes like this:

CAPM: Long-term RF rate

Ibbotson-Chen: Long-term RF rate (to calculate equity risk premium)

Fama-French: Short-term RF rate

Pastor Stambaugh: short-term RF rate

Anything else I am missing?

[Harrogath]

I don’t think all those models will be tested, but surely at least one of them. I have them in my radar.

[yshah]

cfa_010203 has good summary above, add to this:

Gordon growth model for ERP: long-term bond yield

Built-up model: long-term rate.

Bond Yield plus Risk: long-term rate.

someone confirm?