When estimating the cost of equity by use of the CAPM, three potential problems are (1) whether to use long-term or short-term rates for r_RF, (2) whether or not the historical beta is the beta that investors use when evaluating the stock, and (3) how to measure the market risk premium, RP_M.These problems leave us unsure of the true value of r_s.

Question

Quizplus · Accepted Answer

The statement accurately describes potential problems when estimating the cost of equity using the CAPM model, leaving uncertainty around the true value of r_s.

When Estimating the Cost of Equity by Use of the CAPM