Hi everyone,

I have a problem with Practice Questions 13 and 14 of Reading 39 (regarding computation of risk premium) and the errata published by the CFA. I don’t understand why they change the numerator with (1 + 0.080) whereas the formula in the curriculum seemed more consistent with the previous answer. All the info are below (related to question 13)

Note: in the previous questions (11 and 12), the student is asked about the real return of equities and the real return of corporate bonds and the correct answers were 5,8 % for real return of equities and 4,3 % for real restrung of corporate bonds.

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An analyst had the following geometric returns

equities —- > 8%

Corporate bonds —-> 6,5%

Treasury Bills —-> 2,5%

Inflation —-> 2,1 %

Question 13:

The risk premium for equities is :

A 3,2% (erratum : A 5,4%)

B 3,4% (erratum: B 5,5%)

C 3,6% (erratum C 3,6%)

Answer before erratum: A is correct (1 + 0.058) / (1+0.0250) - 1 = 3,2 %

Answer after erratum: A is correct (1 + 0.080)/ (1+0,

.0250) - 1 = 5,4%

i don’t understand the answer after erratum: is it not consistent with the curriculum formula :

(1+r) = (1+r rf) * (1+pi) *(1+RP)

(1+r real) = (1+r rf) * (1+RP) or

(1+r real) = (1+r) / (1+pi)

pi = inflation

RP= risk premium

r rf= real risk return

Any insights ?