Doing practice questions for reading 41. Can’t for the life of me work out why, in the answer for question 2, they don’t subtract the beta x risk free rate item. For example - formula for CAPM r = RF + beta(RM - RF). So why in the answer to they calculate r as RF + Beta(RM)? They are leaving out subtracting the last beta(RF) component. What am I missing here?
Worked it out - comes from understanding the definition of equity risk premium. Equity risk premium = RM - RF. The question gave the ERP, so there was no need to calculate it. I know replying to one’s own post is poor form, but it might help someone.
RM is the expected return on the capital asset RM-RF is the market premium or risk premium Obviously the question could give either one.