Equities,Quant market, return, interest, expected

hanvinh

When you calculate CAPM, do you use:

market return - nominal interest rate

OR

market return - real risk-free interest rate.

-------------------------------

When you calculate NPV, and you've given the risk-free interest, expected inflation rate, and market risk premium & beta, to calculate the cost, do you use:

Risk-Free + Expected Inflation + Market Risk Premium

OR

Risk-Free + Market Risk Premium

eagles_dare13

i agree...unless mentioned, consider nominal.

the point i just want to make is that if you adjust for inflation you will also get 12%...because market risk premium will calculated based on that adjusted rate...

i always get 12%, either ways...

ramzes

agree with tigas... unless mention REAL risk free, consider risk free, nominal.

joemoran

I thought that sounded familiar..

pacmandefense

I think I've seen this question before. As june2009 mentioned, who needs a more creative handle btw, if it is labeled as the risk free rate I believe you can safely assume that that rate is in fact the nominal risk free rate. I believe that will solve the problem correctly.

Ionutzakis

P 216 Schweser book 4.

If a RFR is given with no qualifiers, it IS SAFE to assume its nominal.

ajpheif16

guys, i've been sleeping for one hour so...

my opinion:

- real RFR must be transformed int nominal RFR, (1.04)*(1.03)-1 = 7.12%
- expected market return of 12%
- beta 1

ke= 12%

kasinkei

acer Wrote:
-------------------------------------------------------
> You should be using 15.12, you have to use nominal
> risk free rate and not just risk free rate.
> Clearly mentioned in Schweser.

If a rate is not clearly labeled as REAL, you can assume its a nominal rate. the inflation rate is there to confuse you. the 3% inflation is already included in the 4% (If we assume the 4% is nominal).

We all know to use the nominal rate...the real question is, if a RFR is not clearly labeled as REAL or NOMINAL, which should we assume it is? Schweser says assume its nominal unless CLEARLY stated as REAL.

Damil - whats the answer? the wording is unclear on this one



Edited 1 time(s). Last edit at Friday, June 5, 2009 at 10:42AM by june2009.

Wasteoftime

If RFR is given and it's not mentioned whether it's real or nominal, is it not safe to assume that it's a nominal rate? Even if the expected inflation rate is mentioned in the question..(like Damil's question up there)

LokiDog2

You should be using 15.12, you have to use nominal risk free rate and not just risk free rate. Clearly mentioned in Schweser.