when one to use for required return,when you are given both short-term government bill yield or long-term government bond yield?

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.

What’s the rule here?

Long term for CAPM BYPRP, short term for all else.


Just to be clear, the BYPRP is using the company’s YTM on long term debt, not the government’s. Right?

Long-term government bond yield is ALSO used for Gordon Growth Equity Risk Premium

current dividend yield + long-term consensus growth - long term government bond yield

You guys gotta be careful posting inaccurate stuff.

Yeah, this is suddenly a concern for me. I just got a Fama French question wrong because I used the LT bond instead of the short term bill. Bah.

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.”

Serenity now.

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 hate these inconsistencies!

yeah…it’s very inconsistent.

Fama French use the T-bill rate in all their papers.

Only CAPM uses long term T-Bonds.

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?

Ibbotsen-Chen use long turn RF.

BIRR use T-bill rate.

CAPM = Long-term Govt Yield

BYPRP = Long-term firm yield

Fama = Short-term Yield

Pastor = Short-term yield

Ibbotson Chen = Supply Side = Not specified in the CFAI curriculum

BIRR = Short-term yield

GGM = Long-term yield

However, Ibbotson Chen, just like the GGM, gives a forward looking estimate of the return, so I would go with LT yield…

^ Ibbotson Chen is used in the CFAI Mock PM and the applied yield is LT.

thank you both for your comments. last question, this may be a dumb one, which is the BIRR? that acronym isnt ringing a bell.

BIRR: required return =

  • T-bill rate

  • Sensitivity to confidence risk * Confidence risk

  • Sensitivity to time horizon risk * Time horizon risk

  • Sensitivity to inflation risk * Inflation risk

  • Sensitivity to business cycle risk * Business cycle risk

  • Sensitivity to market timing risk * Market timing risk

what about Buildup Method? RF +ERP+Size+CSRP?

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.

Intuitively you’d think these 3 would be in sync.