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Q: Risk free rate and Return on the market for the UK ( Answered ,   0 Comments )
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 Subject: Risk free rate and Return on the market for the UK Category: Business and Money > Finance Asked by: redshep-ga List Price: \$10.00 Posted: 26 Apr 2005 08:09 PDT Expires: 26 May 2005 08:09 PDT Question ID: 514424
 ```Hello, In order to calculate the Capital Asset Pricing Model for UK companies I need the 'Risk Free Rate' (for 5 and 10 year) and the 'Return on the Market' (not sure if this has a time scale?) for the UK. I need to know where the answers were taken from for referencing purposes. I hope that makes sense, I am struggling with finance. Red```
 ```Redshep -- Motley Fool, an investment site, has both a definition of the U.K. risk-free rate and Rm, or market returns, ?in the U.K. this century.? But since they don?t say which century we should probably find some primary sources: Motley Fool U.K. Glossary http://www.fool.co.uk/school/glossary/glossary9.htm#risk-free_rate_of_return (And note that there is a significant difference between U.S. and U.K. government bonds: they?re tax-free in the U.K. and taxable in the U.S.) You could undoubtedly use the London Financial Times for bonds, but I?ll use the Wall Street Journal quotes (http://www.wsj.com -- in the credit markets section) for U.K. bonds, which have a very flat yield curve: Sept. 2006 maturity, 4.55% Dec. 2009: 4.55% Sept. 2015: 4.57% Mar. 2036: 4.47% Motley Fool is also an excellent source for analyzing the market returns in the U.K. This report is on a Credit-Suisse First Boston (CSFB) study done by the investment bank of long-term market returns for the FTSE 100 ? the Financial Times leading 100 U.K. stocks. The FTSE 100 is probably the most-used index for CAPM calculations, though there is also a FTSE 250 and a FTSE 350: Answers.com ?Wikipedia definition of FTSE 100? http://www.answers.com/topic/ftse-100-index&method=6 You can determine your own period for FTSE 100 returns by using any of a number of stock market sites and looking at the year-end level of the index. I?d recommend the excellent BigCharts.com site and use the ?historical quotes? section for the end of the year ? and uk:FTSE 100 as your symbol for the index: BigCharts.com ?Historical Quotes? http://bigcharts.marketwatch.com/historical/ Here are the numbers for recent years: 2004: 4,814.3 2003: 4,476.9 2002: 3,940.4 2001: 5,217.4 2000: 6,222.5 Google search strategy: U.K. ?risk free rate? gilts U.K. historical FTSE Best regards, Omnivorous-GA``` Clarification of Answer by omnivorous-ga on 26 Apr 2005 09:42 PDT ```Redshep -- I inadvertently dropped the link to story on the excellent CSFB study: Motley Fool U.K. "Guaranteed Stock Market Returns," (Paton, Oct. 31, 2001) http://www.fool.co.uk/news/foolseyeview/2001/fev011031c.htm Best regards, Omnivorous-GA``` Request for Answer Clarification by redshep-ga on 27 Apr 2005 01:50 PDT ```Hello Omnivorous-GA, Many thanks for the quick response and excellent information. Please can you clarify how I work out the return on the market from the FTSE information? I have very little knowledge of finance and want to know how it is worked out! Thanks once again. Red (Here are the numbers for recent years: 2004: 4,814.3 2003: 4,476.9 2002: 3,940.4 2001: 5,217.4 2000: 6,222.5)``` Clarification of Answer by omnivorous-ga on 27 Apr 2005 06:31 PDT ```Redshep -- You might wish to take the market returns from the CSFB or Motley Fool studies, as they're over a long period. Alternately you can create your own averages, though I'd recommend at least a 10-year period -- particularly since this 5-year average is negative, something that long-term studies DO NOT support. You'll be doing year-to year percentages, like the following: 2004: 4,814.3 (4,814.3 - 4476.9) = 337.4 gain on 4476.9 = 7.54% 2003: 4,476.9 +13.6% 2002: 3,940.4 -24.5% 2001: 5,217.4 -16.2% 2000: 6,222.5 Thanks for your kind comments, as I learned something in answering this. I was actually surprised that CAPM studies generally don't use the broader FTSE 350. I think that you know that in the U.S. the Standard & Poor's Index of 500 stocks is used, as it represents a high percentage of the value of U.S. public companies. The best-known index in the U.S. is probably the Dow-Jones industrial averages, because of its longevity (it's almost 100 years older than the S&P500) -- but it measures fewer companies. And there are broader indices, like the Wilshire 5000. Best regards, Omnivorous-GA```
 redshep-ga rated this answer: `Many thanks for the detailed clarification and extra comments. Red`