Oh well… what option was that, if you don’t mind? I can’t quite recall the number, but I know I marked “C”.
Think it was B, sorry mate. C and D were 6% flat and 6.4% or something, but hey, I might be wrong. This is all discussion, nobody has the right answers for sure.
Damn! I had put B first n then at the last moment changed it to C. Thanks though, hk. I’m not very confident about 6%, so I guess I’d throw it in the “wrong” bin
I’m thinking CFAI might have to throw this question out.
If covariance is 290, it’s going to be fairly unlikely that one of the variances is 0.18. Question seems pretty straightforward, but it took me a few moments to regurgitate the Beta calculation. Having said that I spent about 15min trying to do the discounted cashflow questions before realising that I had to divide by the # of shares AAAARGH.
Anyone doubting the answer was 5.4, see the link below for a definition for equity risk premium. Given the fact the question had someone state that you can use the covariance and other information already given to calculate the premium, I thought it a reasonable conclusion to calculate the beta and that the answer would not be the market equity risk premium. Beta = Cov/variance(mkt) variance and covariance should be stated in the same units, so the calc was: Beta = 290/(18^2) =0.9 Risk premium = 0.9*6% = 5.4% http://www.investopedia.com/terms/e/equityriskpremium.asp
^ correct.
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. lizzie, isn’t your definition for Emerging Markets?
richsg21, I used beta*(maret return-rf), but the correct answer is “Maret return-Rf” as per CFA book. The question was little deceptive.
this question gives two correct answers? can’t be? did the question mention any particular manner to calculate te question, anyone remember?