a question on the textbk excercise, (Reading 31 Problem 9)
Currently the short term government bond yield is 9%, while LT government bond yield is 7%.
Q: using the ST government bond rate and a historical quity risk premium (defined in terms of ST government bond rate) to estimate required rate of return, it would
A; bias LT required return on equity estimates upward.
Re=Rf+ Beta* (Rm-Rf)
A higher Rf will increase first part but decrease the second part, with Beta unknown, how can we know it is upward biased or downward?
Thanks for sharing your thoughts!