CFA CFA Level 1 Bogus Question?

Bogus Question?

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    • Avatar of simply_complex2simply_complex2
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        • CFA Level 1
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        the question provides you with all of the information you need to solve it. CAPM = RFR + B(RM-RFR). (RM-RFR) is also known as the market risk premium, so you can calculate the cost of equity using CAPM as they have above. does that help? if not i can try to better explain it. i cant provide a perspective on what the actual exam will be like since im taking it for the first time in about two weeks (trying not to panic) RFR= risk free rate; RM= market risk

      • Avatar of DigitalWizardDigitalWizard
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          So for @simply_complex2‌ and @jmsatchwell‌, what do you use as the risk free rate? and how would we know that it gives us the closest CAPM answer?

            @WesMantooth‌, brilliant. Thank you.

        • Avatar of mattycmattyc
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            Thats rough, no info given about a project. Disconcerting that it comes from CFAI.

          • Avatar of WesMantoothWesMantooth
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              I’ve found mock questions from CFAI and any 3rd party providers to be vague and slightly unfair. My experience on the actual exams for L1&2 was that all the questions were very clear in what they were asking and I never felt as though I was missing information. If there is one thing the CFAI does really well, it is picking exam questions that are tough, fair, and unambiguous.

            • Avatar of DigitalWizardDigitalWizard
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                Thank you @jmsatchwell, you forced me to dig through the curriculum ;-).
                I found where this problem was referencing, page 49 of Volume 4. Section 3.3.1. It looks over CAPM and mentions “If we are evaluating a project with an estimated useful life of 10 years, we may want to use the rate on the 10-Year Treasury bond”.  

                Also I found on page 251 of the 2014 Level 1 Volume 1 CFA curriculum book where it is defining risk rates: The footnotes suggest the 90 day US T-Bill as the best proxy of the Risk Free Rate.
                In addition, one could show that a shorter timeline has less default risk, and with no other indications or wording in the test question about the length of the “project”, the 90 day T-Bill would have (albeit perhaps slightly) less risk than the 10 year T-Bond and is a better choice for the RFR.

                I suppose this exercise was simply a “heads up”. Once in a while questions ARE vague, unfair, or even simply wrong.  ðŸ˜‰
                (Not as often as I first thought they were! I’ve had to prove myself wrong too many times. haha!)

                On to more questions!

              • Avatar of mattycmattyc
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                  Guess Im a little fuzzy on my L1 material, I used the 30 day Rf rate when I plugged in CAPM.

                • Avatar of simply_complex2simply_complex2
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                    @mattyc i dont think they are asking about a specific project. they seem to only be asking about the company overall cost of equity (or at least that’s what i assumed when i was going through it)

                  • Avatar of ufsguyufsguy
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                      The question did not refer to a long-term project, so I can see where one would use the three month t-bill as the risk-free rate.  Tricky.

                    • Avatar of amgbattamgbatt
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                        Great question.

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                        I agree its just a basic CAPM equation. No need to over think it.

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                        The US 10 year is commonly used as a risk free rate due to it being backed by the US gov and having a longer duration that should be mentioned in your readings. If you plug it in to the CAPM equation you get 13.1 since that’s an option for your multiple choice and your inputs are correct you’ve got the answer.

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