Can you please share some knowledge about Equity Risk Premium and Market Risk Premium. Schweser seems to use these two terms interchangeably. Is that right or do I miss a point here? Thank you.
Terms used interchangeably, same concept… E(rm) - Rf rate
thank you
Well, I’m still confused: CAPM Required Rate = Risk Free Rate + (Beta X Equity Risk Premium) versus Build UP = Risk Free Rate + Equity Risk Premium + … Where did the Beta go in the build up model? My (lamer) understanding would be: Market risk premium = R(M) - Risk Free Rate Equity risk premium= beta X market risk premium Please clarify on this topic. Thanks heaps
Type 1 Simple build up: every time you see a build-up you are in luck… all you have to worry about is add all the premiums they give you… size, liquidity, equity risk, etc.etc… is a simple estimate of what the risk is… Type 2 Build up with betas: you could get some types of questions where there are some betas associated factors in a multifactor type model… i.e. Famma French and PSB Type 3 Simply CAPM: Easiest of all…plug and chug that formula… (which is effectively a single factor model to systematic risk, i.e. a single factor APT model) Type 4 Surprise Type factor models: Watch out if you see the word surprise, that mean you only take into account the beta sentitivity to the surprise…i.e. if your expected inflation is 3 and actual inflation is 3 then that factor becomes 0 very rough explanation of things shown everywhere in the curriculum but I hope this helps…
I did a question which asked for a buildup with several premiums given. Additionally, a beta was given as well. In the answer the actually requested a simple build up model without the use of the beta. how do i know whether i have to use the given beta? Thanks for you answers so far…
I think build ups are used in two places… Alt. Inv… no betas…simply add… there was another one somewhere else… if you are given the betas and factors that match those betas…use them… by summing up the multiplication of each individual beta to the factors… rule of thumb…no betas…add up… betas (multiply with factor) they could throw a curve ball to calculate the beta of the CAPM… simply remember Beta = COV(i,m)/Var Market
People are confusing expected return on the market, which is RFR+ERP with just the simple ERP. However, I will note that 1 schweser question did confuse the two terms.