I have noticed to ways to calculate equity risk premium, one assumes risk free rate to be yield of 20 years government bonds, and the other in one of the cfa topic tests assumes short term yield … which one is more accurate?
From what I remember you should use the long term government bond whenever possible because we are matching the maturity to the equity we are valuing which we assume to be a going concern. I think FFM is the only one that is built on the short term government yield. Which topic test did you see the short term yield?
Western and mckinley
Yeah both are using FFM which finds required return, not ERP.
My bad i think i misstated my ques. So is it a rule of thumb to use short term yield in the calculation of required return at the time long term yields are used for ERP
Pretty sure all uses long-term government bond yield, except FFM and APT