Whether an analyst should use a short or long-term interest rate for the risk free rate in calculating the CAPM depends on when the investor receives their future cash flows.

Question

Quizplus · Accepted Answer

The use of short or long-term interest rate for the risk free rate in calculating the CAPM depends on the time horizon of the investor's future cash flows. If the cash flows are expected in the short-term, then short-term interest rates would be appropriate for the risk free rate. If the cash flows are expected in the long-term, then long-term interest rates would be appropriate.

Whether an Analyst Should Use a Short or Long-Term Interest