Actuarial Outpost SOA IFM sample question 15
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#1
10-19-2018, 02:22 PM
 eastla_student Member CAS SOA Non-Actuary Join Date: Jun 2017 Location: LA Favorite beer: 805 Posts: 69
SOA IFM sample question 15

Is it me or is SOA IFM sample question 15 erroneous?

It says the table is giving us the expected return and volatility for stocks X, Y and the market. Then the table column heading says we are getting the required return for stocks X, Y and the market.

The problem then asks us to find the required return for stock Y, assuming CAPM holds.

Isn't the required return = E[X] - risk_free_rate? In that case, the answer should be 2.52 and I don't need to find the risk free rate at all.
#2
10-19-2018, 02:57 PM
 eastla_student Member CAS SOA Non-Actuary Join Date: Jun 2017 Location: LA Favorite beer: 805 Posts: 69
never mind

It's in the errata for 1st Ed of ASM IFM, a correction to the definition of required return. My mistake
#3
10-20-2018, 12:21 AM
 tkt Member CAS SOA Join Date: Jun 2011 Location: Des Moines College: Drake University Posts: 532

Assuming the CAPM holds, the expected return of a security is equal to the required return of a security. Thus, assuming the market is in the CAPM equilibrium, these two terms are often used interchangeably.

The risk premium of X (not the required return of X) is the expected return of X minus the risk-free rate.
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