Expected return = Risk Free Rate + [Beta x Market Return Premium] Expected return = 2.5% + [1.25 x 7.5%] Expected return = 11.9%
How do you calculate CAPM?
To calculate the expected return on assets, you must utilize the CAPM formula: Expected return = risk-free rate + volatility/beta * (market return - risk-free rate).
How is equity calculated in CAPM?
Using the capital asset pricing model (CAPM) to determine its cost of equity financing, you would apply Cost of Equity = Risk-Free Rate of Return + Beta × (Market Rate of Return – Risk-Free Rate of Return) to reach 1 + 1.1 × (10-1) = 10.9%.
What are the 4 components of the capital asset pricing model CAPM equation?
This model estimates the required rate of return on investment and how risky the investment is compared to the total risk-free asset. It is used in the calculation of the cost of equity. Cost of equity = Risk free rate of return + Beta * (market rate of return - risk free rate of return).