One should create a synthetic risk-free rate by adding the expected inflation rate to the long-term historical average real risk-free rate for the period following the financial crisis.

Question

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In the aftermath of the financial crisis of 2008, the U.S. Federal Reserve and several other central banks throughout the world lowered interest rates to historically low levels and simultaneously bought trillions of dollars of government bonds. Together, these actions pushed yields on government bonds to near zero. This poses a challenge in estimating the firm's cost of equity, as these yields are typically used as an estimate of the (nominal) risk-free rate. One can create a synthetic risk-free rate to address this by adding the expected inflation rate to the long-term historical average real risk-free rate.

One Should Create a Synthetic Risk-Free Rate by Adding the Expected