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?
Answer
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.
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