When using the CAPM to estimate the cost of equity for evaluation of investment proposals,the appropriate substitute for the risk-free rate of interest is:
A)the yield on 10-year government bonds.
B)the yield on three-year government bonds.
C)the yield on 90-day treasury notes.
D)the yield on a government security whose term to maturity matches the life of the proposed project.

Question

Quizplus · Accepted Answer

The appropriate substitute for the risk-free rate of interest in the CAPM for evaluating investment proposals is the yield on a government security whose term to maturity matches the life of the proposed project. This approach aligns the duration of the risk-free asset with the investment horizon, ensuring that the risk-free rate accurately reflects the time value of money over the investment period.

When Using the CAPM to Estimate the Cost of Equity