Equity Risk Premium Q

CFA Level II
#1

Anyone remember what question where they have Port. return 6% Port. standard deviation 8% market return 10% market standard deviation 18% Covariance 290 Rf=4% and asked what’s the equity risk premium on the portfolio? I think the answer was a) 4.0, b)5.7 c)6 and d)6.7 What’s the correct answer for this question? i picked b…

#2

b was 5.4

#3

I went w/ beta was 290 / 18^2 =.895 and then port risk premium was .895(.10-.06) = .0537

#4

sweet! thanks guys xD

#5

The equity risk premium is the market return less the risk-free rate. Therefore, 10% - 4% is 6%, choice C.

#6

Beta calculation is involved

#7

No, that’s the MARKET risk premium. The question asked for the individual stocks’s risk premium.

#8

yes…therefore… u need beta

#9

It’s 5.4. Pulled the covariance formula out of my arse and took a gamble that it worked for beta. what do you know, there’s your answer. None of the other beta’s I was coming up with made sense, as they were too far away from 1.

#10

indeed, it was 5.4%, COV / standard dev * standard dev.

#11

NJerseyGuy Wrote: ------------------------------------------------------- > yes…therefore… u need beta Agreed, I was referring to benfica’s post

#12

oops, forgot it was solving for beta, i need to stop trying to recreate this test, i did get the 5.4% and am extremely confident that that is right

#13

equity risk premium is the same as market risk premium, looked it up in the cfa texts, i had 5.4 but i guess its not right

#14

they are both in the CAPM, but not the same result. EQ RISK PREM = RFR + Beta(Market Risk Premium)

#15

v4 page 287, capm cost of equity = yield on lt govt bond + beta * equity risk premium

#16

but a stock’s own equity risk premium is it’s beta times the market risk premium, right?

#17

i hope your right smarshy since i put 5.4 also, just repeating what i read in the book

#18

what was the bond yield?

#19

maybe Rm = 10, rfr = 4?

#20

For the life of me I can’t understand why I couldn’t calculate Beta…I knew the equation, kept trying the numbers and it was coming up with non-sensical answers. Really pissed me off and I ended up going with 6.0, pretty sure that it wasn’t right, but thought maybe I was over thinking it and it was just 6.0. I think I was doing .18^2 and it never clicked to use 18^2, therefore my estimates for Beta were way off the mark.