Question

Which of the following provides the best estimate of the risk-free interest rate for the CAPM...

Which of the following provides the best estimate of the risk-free interest rate for the CAPM approach to estimating the cost of retained earnings?

  1. 30-day Treasury bill
  2. 10- or 30-year Treasury bond
  3. 30-year IBM bond
  4. 90-day Treasury bill
  5. none of the above
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Homework Answers

Answer #1

Option D is correct. 90-day Treasury bill

The security with the risk-free rate may differ from investor to investor. Even though all securities carry some risk but Risk Free Rate for CAPM is typically Rate of Return or Yield of 3 month Treasury Bills. It is a common practice.

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