build up method

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mnieman

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Just did the AM mock, found the fama-french model and they gave us all the inputs and nothing more nothing less so it was incredibly easy.
If on the exam we are asked to use build-up method, which inputs do we use? Just every one they give us?
 
Yeah I think its the risk free rate + everything. Remember there is no beta applied in this one though.
 
Posted above me has it right… I think they will try to tempt you with a CAPM beta of some sort. Don’t fall for it!
You use the full equity risk premium, the risk free rate and any other premium they give you (liquidity, small cap, whatever)…
 
so then the only difference between fama french and build up is that for the fama french you multiply the ERP by the CAPM beta?
 
Fama French is only Small Cap Premium and Book to Market premium… nothing else. (And yes you use a beta for FF)
Build up can be anything they give you. The build up is alternative to using Betas, so therefore you don’t use one :).
 
nvestn wrote:
Fama French is only Small Cap Premium and Book to Market premium… nothing else. (And yes you use a beta for FF)
Build up can be anything they give you. The build up is alternative to using Betas, so therefore you don’t use one :).
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I thought FF = RFR + Bmkt*(Rmkt-RFR) + B*(cappremium) + B*(b/mktpremium)
Then pastor-stambaugh just adds B*(liquiditypremium)
Obviously those betas are each individual for their respective premiums….
 
Yes, that is what I meant… sorry I re-read my post and it looks like I meant you didn’t have RFR or Beta x ERP… your formulas are good!
 
Watch out for that trap where they give u liquidity prem and ask for FF build up
 
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