when one to use for required return,when you are given both short-term government bill yield or long-term government bond yield?
I can see, for risk premium calculation, answers are based in long-term government bond yield but when it comes to calculating required return, answers are based on short-term government bill yield.
I’m combing through the Return Concepts chapter and there doesn’t even seem to be any hardfast rule, just that: “the risk-free return should correspond to the time horizon for the investment.”
Ideally it should be long-term…considering you value on a going concern basis (perpetuity) unless question specifically ask for a particular investment horizon.
Ok I see it in the CFAI curriculum now for Fama French at least. They very explicitly state T-bill rate, that wasn’t clarified in Schweser from what I can tell.
I had this question as well. helpful post. i’m guessing Pastor Stambaugh would use the same rule as FF, ST t-bill rate. Anybody know what would be used for Ibbotsen Chen? The LT bond yield?
FFM/PS using short-term and CAPM using long-term really trips me up.
Especially because the book says that “FFM… Factors are: RMRF, … the return … in excess of the one-month T-bill rate … and is the factor shared with the CAPM” (p75)
Well shit, if it’s the factor shared with the CAPM, why is FFM in excess of 1-month and CAPM is in excess of LT? And PS is just an extension of FFM.