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 writing, great job!
It’s an amazing piece of writing in support of all the online viewers; they will get
benefit from it I am sure.
Hello my family member! I want to say that this article is amazing, great written and include approximately all important infos.
I would like to look extra posts like this .
Howdy! I’m at work browsing your blog from my
new iphone 3gs! Just wanted to say I love reading your blog and look forward to all your posts!
Carry on the fantastic work!
I’m amazed, I must say. Seldom do I come across a blog
that’s equally educative and entertaining, and without a doubt, you’ve hit the nail on the head.
The issue is something too few folks are speaking intelligently about.
I’m very happy that I came across this in my search for something regarding this.
hey there and thank you for your information – I’ve definitely picked up anything new from
right here. I did however expertise a few technical issues using this website,
since I experienced to reload the web site a lot of times previous to I could get it to load
properly. I had been wondering if your web hosting is OK?
Not that I’m complaining, but slow loading instances times will sometimes
affect your placement in google and could damage your
high quality score if advertising and marketing
with Adwords. Well I am adding this RSS to my e-mail and could look out for much
more of your respective fascinating content. Make sure you update this again very soon.
If some one wishes to be updated with newest technologies
afterward he must be go to see this website and be up to date every day.
Awesome! Its really amazing post, I have got much clear idea regarding from this piece of writing.
Soil must be kept moist, do not allow it to dry out.
They were able to turn down the work that they didn’t want, and cherry pick the
higher paying landsdcape jobs. The goal is to enjoy
yourself and the fruit and vegetables you will harvest
later.
That is why thsse incumbents need to be sent home in November and hopefully we can replace them with
people that have the skills to remove the uncertaqinty inn the country today.
The majority of trading programs are able to monitor stock
prices to rapidly notice cycle trends. Before investing in the
stock market, we should have proper knowledge about those rules sso that you mmay play this interesting game smoothly.
Hello! Someone in my Myspace group shared this site with us so
I came to take a look. I’m definitely enjoying the information. I’m book-marking
and will be tweeting this to my followers!
Outstanding blog and brilliant design.
Hey there! Quick question that’s totally off
topic. Do you know how to make your site mobile friendly?
My web site looks weird when viewing from my iphone.
I’m trying to find a template or plugin that might be able to resolve this issue.
If you have any recommendations, please share. Cheers!
Wonderful ԝork! That is the kіnd of іnformation that aгe meant to be shared acrоss tɦe net.
Shame on the search engines fօr no longeг positioning tҺіѕ post upper!
Comе on over and seek advice fгom mʏ website . Thank you =)
Hey there just wanted to gife you a quick heads
up. The text in your arficle seem to be ruhnning off the screen in Safari.
I’m not sure if this is a format issue or something to do with internet browser compatibility but I figured I’d post tto let you know.
The design and style look great though! Hope you
get the issue reslved soon. Thanks
Hurrah, that’s what I was seeking for, what a stuff!
existing here at this website, thanks admin of this
site.
It’s actually very complicated in this busy life to listen news on Television, so
I just use web for that purpose, and get the newest information.
It’s perfect time to make sme plans for the future and it’s time to be happy.
I have read this post and if I could I desir to suggest you
some interesting things or suggestions. Perhaps you could write next articles referring to this article.
I wish to read more things about it!
I’m impressed, I have to admit. Rarely do I come across a blog that’s both educative and entertaining, and without a doubt, you’ve
hit the nail on the head. The issue is something that not enough men and women are speaking intelligently about.
I am very happy that I came across this during my search for something regarding this.
The buyer cannot be sre if he trades for his beneficiation or just plays the gaames of chance arranged by brokers.
I’ve been surfing online more than 3 hours today, yet I
never found any interesting article like yours. It is pretty worth enough for me.
In my opinion, if all web owners and bloggers made good content
as you did, the net will be a lot more useful than ever
before.
Heya i am for the first time here. I came across this board and I find It truly useful & it helped me out much.
I hope to give something back and help others like you aided
me.
Magnificent website. Lots of helpful information here.
I am sending it to a few friends ans also sharing in delicious.
And naturally, thanks on your sweat!
Useful information. Fortunate me I discovered your website accidentally,
and I’m shocked why this coincidence didn’t happened in advance!
I bookmarked it.
If you have ever been to a health food store, I am sure you noticed
the rows upon rows of shelves jam-packed with every vitamin under the sun.
Student lendings weighing youu down?
Everyone loves it when individuals get together
and share ideas. Great website, keep it up!
Wonderful article! This is the kind of information that are supposed to be shared across the net.
Disgrace on the search engines for no longer positioning this publish higher!
Come on over and discuss with my website . Thank you =)
Hi! I just wanted to ask if you ever have any issues with hackers?
My last blog (wordpress) was hacked and I ended up losing a few months of hard work due to no data backup.
Do you have any methods to stop hackers?
Hi, its good piece of writing concerning
media print, we all understand media is a enormous source of data.
Post writing is also a excitement, if you be
familiar with then you can write if not it is complicated to write.
My spouse and I stumbled over here by a different web page and thought I may as well
check things out. I like what I see so now i’m
following you. Look forward to looking over your web page again.
Fantastic beat ! I would like to apprentice while you amend your
website, how can i subscribe for a blog site? The account aided me a acceptable deal.
I had been a little bit acquainted of this your
broadcast provided bright clear idea
Hey! Ι knoow tis іs kinda off topic neѵertheless I’d figured I’d asҟ.
WoulԀ you be іnterested in exchanging links оr maybe guest writing ɑ blog article oг vice-versa?
My site covers a lot of the sɑme topics as yours and I feel wee could ǥreatly benefit from еach otɦer.
If yoս miɡht be interested feel free tо shoot me аn e-mail.
ӏ look forwad tо hearing frrom үou! Wonderful blpog Ьy thee waү!
Excellent website you have here but I was curious if you knew of any community forums that
cover the same topics discussed here? I’d really love to be a part of online community where I
can get suggestions from other experienced individuals that share the same interest.
If you have any recommendations, please let me know.
Cheers!
It’s truly a great and helpful piece of information. I am satisfied that you shared this helpful information with us.
Please keep us informed like this. Thank you for sharing.
Hello, I enjoy reading all of your article. I wanted to write a little comment to support you.
For the reason that the admin of this web site is working, no
uncertainty very soon it will be well-known, due to its feature contents.
Thanks designed for sharing such a nice thinking, post is good,
thats why i have read it fully
Heya exceptional blog! Does running a blog similar to this require a massive amount work?
I’ve no understanding of programming however I had been hoping to start my own blog soon. Anyways, if you have any suggestions
or tips for new blog owners please share. I understand this is off subject nevertheless
I simply needed to ask. Kudos!
Hello it’s me, I am also visiting this website on a regular basis, this website is truly
good and the users are actually sharing pleasant thoughts.
Howdy Hey ! Quelqu’un dans mon
I have read so many articles or reviews about the
blogger lovers but this piece of writing is genuinely a fastidious paragraph,
keep it up.
hi!,I like your writing very a lot! percentage we keep in touch more approximately your article on AOL?
I need a specialist in this area to solve my problem.
Maybe that’s you! Having a look forward to see you.
Hi! Someone in my Facebook group shared this website with us so I came to
check it out. I’m definitely loving the information. I’m
book-marking and will be tweeting this to my followers!
Great blog and superb design.
Happy to receive your thoughts!
You can follow my blog by registering your email address through the link “FOLLOW MY BLOG VIA EMAIL” (found at the right of my site below “ARCHIVES”). You will receive an email from me (as Gargfinanceblog.com), requesting you to confirm your subscription. Once done, all my latest posts will come to your inbox directly.
Hello there! This post couldn’t be written any better!
Reading this post reminds me of my old room mate!
He always kept talking about this. I will forward this page to him.
Fairly certain he will have a good read. Thank you for sharing!
Pretty great post. I simply stumbled upon your weblog and wished to say that I have really loved surfing around your blog posts.
In any case I’ll be subscribing for your
feed and I am hoping you write again soon!
hello!,I love your writing very much! percentage we communicate extra approximately your post
on AOL? I require an expert in this space to resolve my
problem. May be that’s you! Having a look forward to see you.
certainly like your website but you need to test the spelling on several
of your posts. Several of them are rife with spelling problems and I to
find it very troublesome to tell the truth then again I’ll certainly come back again.
Thank you for pointing this out! I’m working on it. And my apologies for the inconvenience so caused. I welcome such feedback on my posts. Thank you once again – Nitin Garg
Heya i’m for the first time here. I came across this board and I
in finding It really useful & it helped me out much.
I am hoping to offer one thing back and help others like
you aided me.
This is really interesting, You’re a very skilled blogger.
I have joined your feed and look forward to seeking
more of your great post. Also, I have shared
your site in my social networks!