SOA IFM sample question 15

[eastla_student]

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.

[eastla_student]

It's in the errata for 1st Ed of ASM IFM, a correction to the definition of required return. My mistake

[tkt]

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.