Why dividend yield is subtracted from RRR

CFA Level II Portfolio Management
#1

Hello,

Reading 25 (Return concepts), there is a EoC question which says that dividend yield is subtracted from required rate of return if the asset is fairly valued. Question want us to calculate price appreciation return.

Does required rate of return includes return on dividends ? If yes then how ? lets take an example of CAPM. How does return on equity through CAPM accounts for dividend yield ?

Thank you in advance

#2

Based on Gordon Growth Model,

RR_i = \frac{D_1}{P_0} + g

where \frac{D_1}{P_0} = Dividend ~yield

So,

Capital appreciation return, g
= RR_i - \frac{D_1}{P_0}