This was the portfolio management question asking for the equity risk premium for Gutenberg when we were given the covariance of 290 and the variance on the market. I picked 6% (E® on the market - Rf) b/c “equity risk premium” was all they were looking for. Earlier this am, users on the forum pointed out that this was the “market risk premium” and you did in fact have to calc. beta. But I just looked it up in the actual CFAI reading and it states, “So we define the equity risk premium as the expected return on the broad market equity index in excess of the long-term government bond yield” ( Stowe, Robinson, Pinto, and McLeavey “Discount Dividend Valuation” p.287) also defined in the Glossary. Can someone please clarify.
If that’s the case then Lord bless you! I picked 6 cuz I couldnt calculate the correct beta for the life of me.
true, but that definition applies to the problem about kazakhstan. for the pm question you had to calculate i beta. and then based on the beta you had an equity risk premium =b*(r of market- r risk free).
long-term government bond yield is just an approximation for risk-free rate. in excess of that would mean according to CAPM beta times the market risk premium minus the risk free rate, i.e. just leave it out.
Just to make it simple, market risk premium is rm-rf, and any single equity’s risk preumium is just beta*(rm-rf)…I am sure about this.
You know i calculated beta out to be 0.433 was that right? Then i used beta*(rm-rf) and couldn’t get an answer. What was the actual numerical answer?
Your beta is wrong…don’t remember something like 0.8-0.9…
yeah answer was 5.4 right"?
i dont remember exactly. I had to rush back to try and save FSA and went thru PM rather quickly. There was an answer though that i matched.
good, i calculated beta*(rm-rf) to get something like 5.7%…phew I struggled with this one for a while and almost put down market risk premium but at the last minute used the beta calc
something like 0.89, had to divide cov by var, trick was to use integer numbers, not put it in decimal form. changed it last second, just at “put your pencils down”…thought it was a tricky one.
oh, yes, now i remember. cov was like 269, stdev of market was 18. beta was 0.8 or so. rest was easy
btw, do you remember the rest of the questions on pm?
Robbers, I tell thee! N here I was working away dividing 290 by 0.18^2
I really don’t think you needed to calc. beta though. Go back to the actual reading they even spell it out in equation (46-3) page 287 CAPM cost of equity = Rf + beta x “equity risk premium” If the equity risk premium did incorporate beta then then this equation would have read beta x “market risk premium”. It did not. Also, the definition of equtiy risk premium from the glossary, “Equity Risk Premium The expected return on equities minus the risk free rate”
i guess i’m the only poor sap that put 6.7%
Now you’re making me yo yo between “bless!” and “F***!”
what they mean by “equity risk premium” is the equity “market” risk premium, the premium I demand for taking on equity risk, i.e. in excess of the risk-free rate.
So 6% is in fact that number, right?
Think it was 5.7 or something, only one answer with a 5…