In one sample CFAI exam question, I was given the 3-month and 10-year riskfree rate to calculate CAPM. I used the 3 month rate instead of the 10 year one and got the question wrong. How come a 10-year rate is more appropriate? I thought a longer maturity increases the risk of the bond (interest rate risk).
that’s a judgement call depending upon the investment horizon of the security under consideration.
thats true, it depends on what security you are evaluating and its investing time horizon.