CAPM - nominal risk free rate and t-bond rate right?

CFA Level I
#1

Just need a confirmation… As titled. I can’t find that in the CFAI book… I need books online now… the search function is much better than the “index”

#2

Yes and for Sharpe I think T bill

#3

Yea, CAPM’s rfr = t-bond rate. Just remember it as equity being held long term.

#4

capm does use the NOMINAL risk-free… and yeh, you use the bond over the bill… although, im not too sure why… t-bill for sharpe ratio?? why is that?

#5

Bcoz sharpe is to measure the excess return of a portfolio over a relatively shorter period of time.

#6

ahhh thanks… thats still a bit odd though… so, capm assumes a longer holding period, whereas sharpe assumes a shorter holding period? has it got anythign to do with their respective measures of risk?

#7

Im not sure… I also rem some one had post something regarding this… If u make a search for it… I think it shoujld come up

#8

I am posting this from another thread Re: CFAI Online Sample Test 3 (Wrong Answer) Posted by: JoeyDVivre (IP Logged) [hide posts from this user] Date: November 24, 2007 08:26AM One difference between a wacc calculation and a Sharpe calculation is that wacc is about forward looking financing decisions and Sharpe is about backwards looking performance evaluation. If your thinking about locking up your money for 10 years the rfr is the rate you could get for that 10 yrs, i.e., the 10-yr Treasury rate. If your looking backwards, the rfr is the rate that someone could get without worrying about holding period returns and timing issues. That’s more or less the average T-bill rate (even T-bills have holding period returns that are different than average returns though). There’s an ugly middle ground where reasonable people can disagree (CAPM). CFAI likes to use long-term interest rates for CAPM type problems with some bogus explanation about stocks are long-term so you should use long-term interest rates (this explanation has nothing to do with anything - least of all some empirical justification - so just use the concept and answer the question correctly).

#9

thanks for finding that, Joey explained it perfectly… he’s a genius that guy