The CAPM formula
(ERm – Rf) = The market risk premium, which is calculated by subtracting the risk-free rate from the expected return of the investment account. The benefits of CAPM include the following: Ease of use and understanding. Accounts for systematic risk.
How is CAPM model calculated?
In layman's terms, the CAPM formula is: Expected return of the investment = the risk-free rate + the beta (or risk) of the investment * the expected return on the market – the risk free rate (the difference between the two is the market risk premium).
What is beta CAPM formula?
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%.