When valuing a stock when do you use ERP or MRP. In the CAPM model?
the equity risk premium is market risk premium adjusted for beta
so r=RFR+ERP r=RFR+B(MRP) r=RFR+B(Rm-RFR) true?
that’s what i thought. i think they can both be called ERP, the MRP is just the ERP for the overall market. i don’t think any of this stuff is material or that they’re going to try to confuse you with it.
“i don’t think any of this stuff is material or that they’re going to try to confuse you with it.” ^^Think again. I had this question the first Saturday of June 2008. Seemed simple, but once I returned to AF there was a heated debate.
I got confused because of question 104130 from schweser.
fuck
planner can you give me a vague description of the concept tested in the june 08 question that you’re talking about
What is the equity risk premium given the following data? Beta 1.2 Exp mkt return 10 Exp stock return 7 RFR 4.5
sorry for but i just got to this stuff so i didn’t know this has been discussed already. Thanks for the answer.
@planner: thats ambiguous because the ERP could be related to the specific security in which case its 1.2(10-4.5)=6.6% or to the overall equity market in which case its just 1(10-4.5)=5.5%.
beta * mrp Didn’t read that question was asking about premium and not expected return hence no CAPM
that’s messed up, i’m gonna say it’s 2.5% (ERP for the stock) to be consistent with what i said above
6.6, no? MRP * beta?
is that really how ambiguous the cfai question was?
3.6?
“Beta 1.2 Exp mkt return 10 Exp stock return 7 RFR 4.5” honestly how is that even possible, it’s not even consistent with CAPM. does cfai actually word questions like this?
@super: It is because CAPM gives you the required return which you then compare to the expected return to determine over/undervaluation.