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.