Challenges in advanced management accounting
Challenges in advanced management accounting

Start this free course now. Just create an account and sign in. Enrol and complete the course for a free statement of participation or digital badge if available.

Free course

Challenges in advanced management accounting

3.7.3 Other problems with the CAPM calculation

The risk-free rate can also be difficult to estimate. Government securities have traditionally been taken as the risk-free rate. However, the financial difficulties in Europe from 2008 onwards and subsequent losses for bond investors have shown that many government equities certainly do come with some risk. Even the UK and the US have suffered credit rating downgrades as a result of continuing sovereign debt problems (BBC News, 2011). Though their ratings are still high, the downgrades reflect the fact that they are not considered absolutely risk free anymore.

CAPM only produces an expected return for one year at a time so, in theory, when using the expected return as a discount factor, it needs to be estimated separately for every year of the analysis. However, note that this is a problem that all types of discounted cash flow methods share and not just using discounted cash flows with a discount rate derived from the CAPM.

B392_1

Take your learning further

Making the decision to study can be a big step, which is why you'll want a trusted University. The Open University has 50 years’ experience delivering flexible learning and 170,000 students are studying with us right now. Take a look at all Open University courses.

If you are new to university level study, find out more about the types of qualifications we offer, including our entry level Access courses and Certificates.

Not ready for University study then browse over 900 free courses on OpenLearn and sign up to our newsletter to hear about new free courses as they are released.

Every year, thousands of students decide to study with The Open University. With over 120 qualifications, we’ve got the right course for you.

Request an Open University prospectus