When you’re asked to calculate risk premium based on a number of factors and the vignette gives you both the return on short term government securities and long term government securities, do you always subtract your total equity return by the long term rate to find the premium?
I believe, and someone please correct me if I’m wrong, the answer is typically yes. This is because when valuing investments, you’re valuing cash flows over multi-year periods. However, if you’re making short-term investments / your investment horizon is more short-term, then you could use the short-term government rate. For whatever reason, I tend to struggle with that section, so someone please set the record straight if I’m off base.
If it is in relation to a multi factor model and you are given the T bill rate and 10 year, it’s the T bill rate you want to use (don’t think this usually happens, but it could!). Other than that, yes long term is what you want to use.