Cap Mkt Expectations: Risk Prem. Approach

CFA Level III
#1

Hi all,

A little condfused on how to use the ‘build up approach’ / risk premium approach to calculation required return.

The text says that the approach takes the bond yield and then adds the equity risk premium. But the Schweser text (page 94, book 2) only has the formula for the return on a bond.

Do you then take that number and add an equity risk premium? Of the return on the bond the equity return?

Thanks.

#2

Nevermind. figured this out.

You can use this approach to calc the required return of a risky bond or equity, but the formulas are different and unrelated.