Question #19
Reading: Reading 17 Cost of Capital - Advanced Topics
PDF File: Reading 17 Cost of Capital - Advanced Topics.pdf
Page: 8
Status: Unattempted
Correct Answer: B
Question
An analyst attempting to derive the equity risk premium for a stock starting from the required return for that stock would find which of the following statistics least useful?
Answer Choices:
A. The stock’s beta
B. The stock’s estimated return
C. Historical 10-year Treasury bond rates
Explanation
The required return for a stock is equal to the risk-free return plus beta times the equity
risk premium. An analyst starting from the required return would need beta and a risk-
free rate. Historical 10-year T-bond rates can be used as an estimate of the risk-free rate.
Since the analyst is starting with the required return, estimated returns are not needed.