Im given expected CAPM on annual basis of 12.6%, while P0=$20.75 and P3=$29 and the problem asks to solve for three-year holding period return.
Why 29/20.75-1 is not equal to (1+12.6%)^3? Im given annual required return of 12.6% so what’s wrong?
And in general, why expected return and required return aren’t the same? like come on…
HPR does NOT have the same assumptions as CAPM. Other variables are included in CAPM whereas with HPR there are not. Also, since it is over multiple periods, you should take the geometric average of 29/20.75-1 which means raising it to the 1/3 power. HPR is analogous with CAGR with more than one period.
I am getting 11.8 percent for your 3 year HPR. Expected return/Required Return at 12.6 annually means that this security did not meet expectations.
If anyone else out there can explain it better please do so, but this is my view.
PS: This is the L2 forum and I think this is more of a L1 question. Just a heads up 