A short-term T-bill's rate of return should be used in the CAPM formula to determine the cost of equity capital regardless of the length of the project under consideration.

Question

Quizplus · Accepted Answer

The CAPM formula uses the risk-free rate, which is typically represented by the yield on a long-term T-bill. This long-term rate is more appropriate when evaluating the cost of equity capital for a project with a longer time horizon. Short-term T-bill rates may be more appropriate for projects with shorter time horizons.

A Short-Term T-Bill's Rate of Return Should Be Used in the CAPM