uncovered in the data and each asset’s exposures (betas)
relative to the factors.
3 N.F.Chen,R.R.Roll,andS.A.Ross,“EconomicForces
and the Stock Market,” Journal of Business 59 (1986):
383–403.
4 F.WestonandT.E.Copeland,ManagerialFinance(Fort
Worth,TX:DrydenPress,1992).WestonandCopelandused
both approaches to estimate the cost of equity for oil
companiesin 1989 andcameupwith14.4percentwiththe
CAPM and 19.1 percent using the APM.
5 By well-behaved term structures, we would include a
normalupwardlyslopingyieldcurve,wherelong-termrates
are at most 2 to 3 percent higher than short-term rates.
6 Some governments doissuebonds with30-yearor even
longermaturities.Thereisnoreasonwhywecannotusethese
as risk-free rates. However, there may be problems with
estimating default spreadsand equity riskpremiums, since
they tend to be more easily available for 10-year maturities.
7 Reducingthecorporateborrowingrateby 1 percent(which
isthetypicaldefaultspreadonhighlyratedcorporatebonds
intheUnitedStates)togetarisklessrateyieldsreasonable
estimates.
8 Forinstance,ifthecurrentspotrateis38.10Thaibahtper
U.S.dollar,the10-yearforwardrateis61.36bahtperdollar
andthecurrent10-yearU.S.Treasurybondrateis 5 percent,
the 10-year Thai risk-free rate (in nominal baht) can be
estimated as follows: