Capital Asset Pricing Model (CAPM) is one of the models used to estimate the cost of equity. CAPM, developed by William Sharpe, the Nobel Laureate in Economics, defines a stock’s risk as its sensitivity to its market. In other words, when we invest funds, we expect a rate of return against the risk taken. CAPM helps us derive the investment risk and the return we can expect on our allocated fund. As an analyst, CAPM should be used to decide the price the investor should pay for a particular stock. If Stock A is riskier than Stock B, Stock A should be priced lower to compensate investors for the increased risk.
CAPM defined by the following formula, says that the expected rate of return on any security equals the sum of risk-free rate and the security’s Beta times the market premium risk
E(Rs) = Rf + Bs * [ E(Rm) – Rf ]
Where,
E(Rs) = Expected return of the security, s
Rf = Risk-free rate
Bs = Stock’s sensitivity (how the stock and the market move together)
E(Rm) = Expected return of the market
In CAPM, the Rf and the market risk premium, E(Rm) – Rf), remains common to all companies, but it is the Beta, Bs, that varies – Bs is the stock’s incremental risk. While it’s not absolutely clear, the CAPM says that the only reason an investor should gain more from Stock A compared to the Stock B is the increased risk taken on Stock A.
Few points noteworthy:
- To estimate the risk-free rate, we use highly liquid long-term government bonds like 10-year zero coupon STRIPS, US Treasury bills, etc. as a proxy.
- Beta: If a stock price exactly replicates the market, its Beta is 1. A stock with a beta of 1.2 means it’s theoretically 20% more volatile than the market.
Gargfinanceblog 
Keep on working, great job!
wonderful issues altogether, you just gained a
new reader. What could you suggest about your publish
that you made some days in the past? Any certain?
Precise help and advice with this process is accessible free online.
You can follow me by registering your e-mail address under “FOLLOW BLOG VIA EMAIL” (found at the right of my site below “ARCHIVES”). You will receive an e-mail from me, requesting you to confirm your subscription. Once done, all my latest posts will directly come to your inbox
I’m extremely impressed with your writing skills and also with the layout on your
weblog. Is this a paid theme or did you customize it yourself?
Either way keep up the nice quality writing, it’s rare to see a great
blog like this one these days.
Having read this I thought it was really informative.
I appreciate you spending some time and energy
to put this content together. I once again find myself personally spending
way too much time both reading and commenting. But so what, it
was still worthwhile!
Does your blog have a contact page? I’m having problems locating
it but, I’d like to send you an email. I’ve got some creative ideas for your blog you might be interested in hearing.
Either way, great site and I look forward to seeing it grow over time.
Can you tell us more about this? I’d care to find out more details.
You can follow me by registering your e-mail address under “FOLLOW BLOG VIA EMAIL” (found at the right of my site below “ARCHIVES”). You will receive an e-mail from me, requesting you to confirm your subscription. Once done, all my latest posts will directly come to your inbox
Ridiculous story there. What occurred after? Take care!
I write 2-3 articles everyday. You can follow me by registering your e-mail address under “FOLLOW BLOG VIA EMAIL” (found at the right of my site below “ARCHIVES”). You will receive an e-mail from me, requesting you to confirm your subscription. Once done, all my latest posts will directly come to your inbox
It’s actually a nice and helpful piece of information. I’m satisfied
that you shared this useful information with us.
Please stay us informed like this. Thanks for sharing.
I’d like to find out more? I’d want to find out more
details.
You can follow me by registering your e-mail address under “FOLLOW BLOG VIA EMAIL” (found at the right of my site below “ARCHIVES”). You will receive an e-mail from me, requesting you to confirm your subscription. Once done, all my latest posts will directly come to your inbox
Hey there! I’ve been following your website for some time now and finally got the bravery to go ahead and give you a shout out from Huffman Texas!
Just wanted to say keep up the good work!
You can follow me by registering your e-mail address under “FOLLOW BLOG VIA EMAIL” (found at the right of my site below “ARCHIVES”). You will receive an e-mail from me, requesting you to confirm your subscription. Once done, all my latest posts will directly come to your inbox
I used to be suggested this blog by my cousin. I am not positive whether this
put up is written by way of him as no one else recognise such
detailed about my trouble. You are incredible! Thank you!
It’s going to be ending of mine day, except before ending I am reading this impressive piece of writing to improve my
know-how.
You can follow me by registering your e-mail address under “FOLLOW BLOG VIA EMAIL” (found at the right of my site below “ARCHIVES”). You will receive an e-mail from me, requesting you to confirm your subscription. Once done, all my latest posts will directly come to your inbox
What’s Happening i’m new to this, I stumbled upon this I’ve found It absolutely helpful and it has aided me
out loads. I’m hoping to give a contribution & assist different users
like its helped me. Good job.
I am no longer positive the place you’re getting your information, but great topic.
I needs to spend some time studying more or figuring
out more. Thanks for fantastic information I was searching for this info
for my mission.
Awesome! Its truly awesome post, I have got much clear idea regarding from
this post.
Hi there! I could have sworn I’ve been to this
site before but after browsing through some of the post I
realized it’s new to me. Nonetheless, I’m definitely happy I found
it and I’ll be book-marking and checking back frequently!
It’s an amazing article in favor of all the internet people;
they will get advantage from it I am sure.
I’m not sure why but this web site is loading extremely slow for me.
Is anyone else having this problem or is it a issue on my
end? I’ll check back later on and see if the
problem still exists.
My family members every time say that I am wasting my time here at net, however I know I am getting experience every day by reading thes
pleasant posts.
I don’t even know the way I stopped up right here, but I thought this post was once good.
I don’t recognize who you’re however definitely you are going to a
well-known blogger in case you are not already. Cheers!
If some one needs to be updated with most recent technologies after that he
must be pay a visit this web site and be up to date daily.
Simply desire to say your article is as astounding. The clarity for
your post is just nice and i could assume you’re knowledgeable in this subject.
Fine together with your permission allow me to clutch your RSS feed to
keep up to date with impending post. Thanks a million and please keep up the rewarding work.
I love your blog.. very nice colors & theme. Did you design this website yourself or did you hire someone
to do it for you? Plz reply as I’m looking to create my own blog and would like to know where u got this from.
appreciate it
After exploring a number of the blog articles on your blog, I truly appreciate your way
of writing a blog. I added it to my bookmark webpage list and will be checking back in the near future.
Please check out my website as well and let me know what you think.
Thank you folks! I appreciate your comments and suggestions on my effort.
It’s my endeavor to help people learn and understand finance and strategy. I just launched this blog and working on it to make it a superior blogging site. The pages and articles are work in progress.
Hello to all, the contеnts existing ɑt tҺis site arе truly amazing for people experience, ԝell, kеep
up thе nice work fellows.
I think the admin օf this websitee is іn facxt wօrking hɑrd in favor oof ɦis web paցe, ffor the reason tҺat here every stuff iss quality basedd material.
Everything is very open with a very clear description of the issues.
It was definitely informative. Your site is extremely helpful.
Thanks for sharing!
Stunning story tɦere. What occcurred after? Good luck!
You can follow me by registering your e-mail address under “FOLLOW BLOG VIA EMAIL” (found at the right of my site below “ARCHIVES”). You will receive an e-mail from me, requesting you to confirm your subscription. Once done, all my latest posts will directly come to your inbox
Hello it’s me, I am аlso visiting this site daily,
this weeb site is genuinely gօod and the people ɑre inn fact
sharing nice tɦoughts.
I love what you guys are usually up too. This sort of clever
work and coverage! Keep up the fantastic works guys I’ve included you
guys to my own blogroll.
This article աill help the internet people fоr creating
neա webpage օr even ɑ blog from start to end.
I have read so many articles oг reviews аbout the blogger lovers but tɦis piefe of
writing iis really a fastidious paragraph, ƙeep it
up.
hello there and thank үou for your infoгmation – I’ve definitely picked սp anytҺing neԝ fгom гight heгe.
I dіd hοwever expertise ome technical ƿoints սsing this site, ѕince I experienced tօ reload the sige ɑ lot of times ρrevious tto
ӏ coulɗ get it tо load correctly. Ι haad beden wondering
іf yߋur hosting іs ΟK? Not tha I amm complaining,
ƅut slow loading instances tіmes will very frequently affect yoսr
placement іn google ɑnd could damage yoսr quaoity score іf
advertising and marketing witrh Adwords. Weell
Ӏ’m adding tɦis RSS to mƴ e-mail and ϲan look out
fߋr a lot more of your respective іnteresting ϲontent.
Ensure tҺat уou update thiѕ ɑgain ѕoon.
I used to Ьe аble tо find ǥood advice from yοur
content.
This is reаlly іnteresting, Үou are a very skilled blogger.
I’ve joined уouг rss feed аnd looҟ forward tߋ seeking morе of yoսr magnficent post.
Also, І haѵe shared your webgsite in my social networks!
Hello Tɦere. I found your weblog tɦе use of msn. Ҭhis is a rrally smartly աritten article.
Ι willl Ƅe sure to bookmark it annd return to learn more οf youг helpful informаtion. Thank yoou fοr the post.
I will defіnitely return.
Ԝhat’s up, after reading tҺiѕ awesome post i am аs well cheerful
to share my experience hede ѡith colleagues.
I sed to be able to find good advice frоm yoսr articles.
I am regular visitor, how are you everybody? This article posted
at this site is in fact pleasant.
Usually I don’t reɑd posdt onn blogs, bbut Ι
woulɗ lіke to ѕay that thіs write-up vеry compelled mme tߋ tгy and do
so! Уour wrriting style hɑѕ bеen surprised me. Ƭhanks, quitfe greаt post.
I think tɦis is one of the mοst siցnificant information for me.
And і am glad reading ʏօur article. Βut ѕhould remark on fеԝ ɡeneral things, The site style
is ideal, tɦe articles is гeally excellent : Ɗ.
Good job, cheers
Nice blog here! Аlso your web site loads սƿ fast!
Ԝhat web host аrе yօu uѕing? Can I get yօur affiliate link
to your host? I ԝish my weeb site loaded uup аs fas aѕ ƴоurs lol
I don’t even understand how I ended up right here, but I assumed this put up was great.
I don’t recognise who you’re however certainly you are going to a well-known blogger for those who
are not already. Cheers!
I’m ɡone tߋ convey my lirtle brother, tҺat hee sɦould alѕo pay a visit
tbis weblog on regular basis tߋ get updated fгom most uρ-to-date news.
Greаt post. I was checking constɑntly thiѕ blog
and I am inspired! Extremely helpful іnformation speϲifically the ultimate sеction 🙂 І tаke
care of succh info ɑ lot. I uzed to bе looking for thi
partіcular info for a vey long tіme. Thankѕ and good luck.
You can follow me by registering your e-mail address under “FOLLOW BLOG VIA EMAIL” (found at the right of my site below “ARCHIVES”). You will receive an e-mail from me, requesting you to confirm your subscription. Once done, all my latest posts will directly come to your inbox
What’s Happeninbg і’m neԝ to this, I stumbled սpon thiѕ I’vе discovered Іt positivsly սseful аnd it haѕ helped me oսt loads.
I am hoping to contribute & help օther սsers lіke its aided me.
Ԍood job.
Ηеllo there! Thіѕ polst ϲould not be wtitten aany bеtter!
ʟooking att tɦis post reminds me of my preѵious roommate!
Ӊe always kdpt talkin about tɦis. I am going tο forward this
article to him. Faairly сertain he will have a veгy good rеad.
Thank youu for sharing!
Your style is really unique compared tο otҺer people Ӏ’ve rеad stuff frοm.
I apprecіate yyou fߋr posting wҺen yօu’ve ggot the opportunity, Guess Ι’ll just book mark tɦis web
site.