I did the same thing Sponge_Bob_CFA … kept getting a beta in the thousands… feel like such an idiot for not getting that since I actually knew the equation. I think most ppl made silly errors like this… ie not recognizing the FI bonds were zeros, etc…
Smarshy Wrote: ------------------------------------------------------- > but a stock’s own equity risk premium is it’s beta > times the market risk premium, right? Absolutely correct.
i know i got this one wrong, but could someone explain to me what was the covariance?. did they somehow indicate it was 290%%?. there is no way you can use 18 as the std deviation. it was clearly 18%. so the only way for this to provide any meaningful betas is if covariancewas on a different scale.
.0290/.18^2 = 0.89 beta You just had to change the covariance around a little bit to find out what scale he was referring to.
so there was some information about the covariance scale?.damnnit .i must be blind.
It didn’t give you the scale, you just had to F around with it until you got a number that made sense (at least thats what I did).
If they had wanted us to invlove beta they would have asked for the cost of equity or required rate of return on equity.
McLeod81 Wrote: ------------------------------------------------------- > It didn’t give you the scale, you just had to F > around with it until you got a number that made > sense (at least thats what I did). lol - same here - i did the same with quants for the 0.39ish as i could not remember the exact formula
do you really think they are testing you on your ability to subtract one number from another, given the fact that they have given you the inputs to solve for beta?
lizzie404 Wrote: ------------------------------------------------------- > If they had wanted us to invlove beta they would > have asked for the cost of equity or required rate > of return on equity. CFAI likes to make you think outside of the box.
lizzie404 Wrote: ------------------------------------------------------- > If they had wanted us to invlove beta they would > have asked for the cost of equity or required rate > of return on equity. Cost of equity would be the full CAPM, but the Equity risk premium is just that…the premium over the risk free rate.
i have no problems in accepting 5.4% , except ,nobody is clear why they chose 290%% (sans trial and error) ,especially since nobody recalls where the scale information was mentioned in the vignette. using 18 in the denominator is nonsense.
Wasn’t the covariance of the market and security 290? If so, the beta equals covariance divided by variance of the market = 290/(18*18) = .895.
std deviation was 18%. absolutely sure about that.
I think we don’t need any scale information from the vignette to solve this one. Stddev is always taken in % format and Covariance is always taken in %squared format. If you are going to use the decimal format then use .029 for Cov and 0.18 for stddev. If you are not going to use the decimal format then go ahead and use 290 for Cov and 18 for stddev. Both case answer will be same.
^^ dont agree with the ‘general’ format. there is no such convention afaik. its like saying 70 is the passing score or is it 70%?.ok bad analogy. i’ll take the -1 and fume in silence.
Dsylexic Wrote: ------------------------------------------------------- > ^^ dont agree with the ‘general’ format. there is > no such convention afaik. its like saying 70 is > the passing score or is it 70%?.ok bad analogy. > i’ll take the -1 and fume in silence. Sorry by mistake I said that it will be in % format for all cases. Format of Stddev will depend on the underlying variables which in this case is the % return. Same for Covariance.
they also like to test core concepts…as deceptively simple as they may be…look up the definition of equity risk premium in the glossary of every CFAI volume.
hi, guys, did anybody NOTICE the other solution of equity risk premium as follows? CFAI volume 4, page 289 GGM equity risk premium estimate= Dividend yield on the index +consensus long-term earnings growth rate - current long-term government bond yield still not sure which one is correct one???
jerry2008 Wrote: ------------------------------------------------------- > hi, guys, did anybody NOTICE the other solution of > equity risk premium as follows? > > CFAI volume 4, page 289 > > GGM equity risk premium estimate= > Dividend yield on the index > +consensus long-term earnings growth rate > - current long-term government bond yield > > still not sure which one is correct one??? This is not equity risk premium, its market risk premium. Equity risk premium = Required return (of equity) - risk free rate Market risk preium = required return (of market index) - risk free rate.