What are the CAPM inputs? How would you estimate them? What is the appropriate risk-free rate...
What are the CAPM inputs? How would you estimate them? What is the appropriate risk-free rate in CAPM?
Homework Answers
Capital Asset pricing model:
As per CAPM model:
Re= Rf+(Rm-Rf)B
Re= required rate of return.
Rf= Risk-free rate.
Rm =Market Risk Premium.
B = Beta, systematic risk.
How each of them is determined/estimated?
Risk-free rate (Rf) is the rate of return an investor expects to earn from an investment which carries zero risk.
Rm return on market: it is determined by the overall return on the market. For example: S&P500 Index in the USA, Nifty in India.
Beta that is systematic risk is determined by: Rate of change of stock return to the rate of change of market return. It is the sensitivity of stock return to Market return.
What is the appropriate risk-free rate in CAPM?
The appropriate risk-free rate in CAPM is T-bill rate, the interest rate paid on 3Months government Treasury bill.
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What are the CAPM inputs? How would you estimate them?
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