Please see âLeveraged Betas and the Cost of Equityâ and/or your class notes for help with this. Besides the beta you will need several other variables to use the CAPM. You need to think about what risk free rate to use. Typically we think about the short-term treasury bills as an appropriate rate, but there are some reasons in this case to think that the long-term Treasury bond yield might be a better rate to use...
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Think about these two alternatives and maybe do your calculations both ways. Exhibits 4 and 5 provide information to help you calculate the market risk premium (Rm â Rf). Important here is what you use for the risk-free rate and what time period you look at. You may also think about the difference between geometric averaging and arithmetic averaging of market returns...