Quantitative Finance Stack Exchange is a question and answer site for finance professionals and academics. Join them; it only takes a minute:

Sign up
Here's how it works:
  1. Anybody can ask a question
  2. Anybody can answer
  3. The best answers are voted up and rise to the top

I have trouble understanding what type of maturity to use when calculating CAPM. My professor uses the 3-Month risk-free rate to backtest a portfolio strategy that uses a lookback period of 1 year daily returns. Another professor uses the 10-year risk-free rate? Shouldn't one use the maturity that corresponds to the holding period as it best describes the opportunity forfeited? Is the risk-free rate chosen out of preference? wouldn't this just under/overstate CAPM?

share|improve this question
Could you provide more information on how they use these risk free rate ? My guess is that they choose the risk free rate accordingly to the time-step used in the considered method. – Were_cat Aug 16 '14 at 0:49
@Imorin Sure, the professor that used the 3-month risk-free rate took an actual time series of returns and subtracted the 3-mo risk free rate time series (found in FRED) to find the market risk-premium. The other professor simply uses the 10-yr rate and subtracts it from the cumulative return of the strategy/returns in that given time frame. – Jason Guevara Aug 16 '14 at 1:16
up vote 1 down vote accepted

I think the best strategy is to follow Ken French who posted all of the Fama-French factors on his website a while ago, including the risk-free rate.

The latter is updated at the same frequency as the portolio returns, e.g. you can't use a 3-month - based rate if you work with monthly equity returns.

share|improve this answer

Your Answer


By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.