CAPM Formula
Per the capital asset pricing model (CAPM), the cost of equity – i.e. the expected return by common shareholders – is equal to the risk-free rate plus the product of beta and the equity risk premium (ERP).
What is equity beta in CAPM?
Beta is the standard CAPM measure of systematic risk. It gauges the tendency of the return of a security to move in parallel with the return of the stock market as a whole. One way to think of beta is as a gauge of a security's volatility relative to the market's volatility.
How do you find cost of equity with beta?
Under this model, Cost of Equity = Risk-Free Rate of Return + Beta × (Market Rate of Return – Risk-Free Rate of Return).
Does CAPM calculate beta?
The CAPM estimates an asset's Beta based on a single factor, which is the systematic risk of the market. The cost of equity derived by the CAPM reflects a reality in which most investors have diversified portfolios from which unsystematic risk has been successfully diversified away.
What is cost of equity CAPM?
CAPM is a formula used to calculate the cost of equity—the rate of return a company pays to equity investors. For companies that pay dividends, the dividend capitalization model can be used to calculate the cost of equity.