CAPM question

[clearchemist]

This seems like a basic question, but I’ve seen the following in a few questions and can’t help wonder if the book, or I, am making a mistake.
CAPM says that keq = Rrf + beta(Rmp-Rrf)
I have seen a few questions where the risk free rate is not subtracted in the second term, such that the book’s answer is CAPM = Rrf + beta*Rmp
Am I missing something here? E.g. is there a scenario where beta*Rmp should be used in place of beta(Rmp-Rrf)?
Thank you.

 

[tctreasury]

Maybe you are seeing the term Equity Risk Premium (which would be another way of saying market return minus risk free rate)?

 

[S666]

I would second what tctreasury mentioned, in that you have to distinguish between “expected return of the market” and “Market/equity risk premium”
The CAPM equation is keq = Rrf + beta (Er(M) - Rrf)
or keq = Rrf + beta(Rmp)
So basically Market Risk Premium (Rmp) is the Expected market Return (Er(M)) minus the Risk Free rate (Rrf).

 

[fbivictor]

The expression Rmp-Rrf is also known as Market Risk Premium. In some questions we are given the Market Risk Premium instead of Rmp. So the CAPM is written as Rrf+beta(Market Risk Premium).

 

[S2000magician]

tctreasury wrote:Maybe you are seeing the term Equity Risk Premium (which would be another way of saying market return minus risk free rate)?

Market risk premium, not equity risk premium.
The term equity risk premium is generally applied to a single stock (e.g., the difference between the return on a company’s stock and its bonds), not to the market as a whole.

 

[MrSmart]

S2000magician wrote:

tctreasury wrote:Maybe you are seeing the term Equity Risk Premium (which would be another way of saying market return minus risk free rate)?

Market risk premium, not equity risk premium.
The term equity risk premium is generally applied to a single stock (e.g., the difference between the return on a company’s stock and its bonds), not to the market as a whole.

I’ve always seen MRP and ERP being used interchangebly.

 

[tctreasury]

S2000magician wrote:

tctreasury wrote:Maybe you are seeing the term Equity Risk Premium (which would be another way of saying market return minus risk free rate)?

Market risk premium, not equity risk premium.
The term equity risk premium is generally applied to a single stock (e.g., the difference between the return on a company’s stock and its bonds), not to the market as a whole.

I appreciate what you are saying…I am just quoting verbatim from Schweser (happen to be looking at my 2010 Level 2 books at the time). It also uses ERP in the CFA book.