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 
Hi, Neat post. There is an issue with your site in internet explorer, would test this?
IE still is the market chief and a good element
of people will leave out your great writing because of
this problem.
Thank you for your feedback. I’m working on it to resolve this matter. Glad that you liked my article! – Nitin Garg, Author
Hey, I think your website might be having browser compatibility
issues. When I look at your blog site in Chrome, it looks fine but when opening
in Internet Explorer, it has some overlapping.
I just wanted to give you a quick heads up! Other then that, fantastic blog!
Thank you for the feedback. I’m looking into this matter – Nitin Garg, Author
You made some good points there. I checked on the internet
to find out more about the issue and found most individuals will go along
with your views on this web site.
Good day! Do you know if they make any plugins to protect against hackers?
I’m kinda paranoid about losing everything I’ve worked
hard on. Any suggestions?
What’s up to all, how is the whole thing, I think every one is
getting more from this web site, and your views are nice in support of new visitors.
Hey there! I’m at work surfing around your blog from my new iphone!
Just wanted to say I love reading your blog and look forward to all
your posts! Keep up the superb work!
Everything is very open with a clear clarification of the challenges.
It was really informative. Your website is useful.
Many thanks for sharing!
Thanks for finally writing about >What is CAPM? How do you calculate it?
– Gargfinanceblog.com <Liked it!
It’s going to be ending of mine day, except before ending
I am reading this enormous piece of writing to increase my
know-how.
Greetings! Very helpful advice within this article! It’s the little changes that make the
largest changes. Thanks a lot for sharing!
An outstanding share! I have just forwarded this onto a friend who has been conducting a little research on this.
And he actually bought me dinner simply because I found it for him…
lol. So let me reword this…. Thank YOU for the meal!!
But yeah, thanx for spending the time to talk about this topic
here on your site.
Ӊi thre Dear, are yоu trulʏ visiting tɦіѕ website
regularly, if sߋ afterward уou ѡill absolսtely obtai nice
ƙnow-Һow.
I’m curious to find out what blog platform you’re working with?
I’m experiencing some minor security issues with my latest blog and I would like to find something more safeguarded.
Do you have any solutions?
Have yoou ever thought about publishing an e-book or guest authoring
on other sites? I have a blog based upon on the same information you
discuss and would really like to havee you share some stories/information. I knokw my subscribers would value your work.
If you’re even remotely interested, feesl free to shooot me an email.
Interesting blog! Is your theme custom made or did you download it from somewhere?
A design like yours with a few simple tweeks would really make my blog shine.
Please let me know where you got your design.
Thanks a lot
Amazing! Its actually amazing paragraph, I have got much clear idea about from this paragraph.
I think that everything said was vesry reasonable.
But, think on this, what iff you composed a catchier title?
I mean, I don’t want to tell you how to run your website, but what
if you added a post title thwt grabbed folk’s attention? I mean What is
CAPM? How do you calculate it? – Gargfinanceblog.com is a little vanilla.
You should glqnce at Yahoo’s home page and note how they create
article headlines to get viewers interested. You might try adding a video
or a pic or twwo to get readers excited about what
you’ve written. Juust my opinion, it would make your poets a little bit more interesting.
Thank you very much! I appreciate your views. I’ll definitely incorporate it – Nitin Garg, Author
hi!,I love yourr writing vewry much! proportion we
communicate more about your post on AOL?
I need ann expert in this space to resolve my problem.
May be that is you! Haviing a look ahead to look you.
It’s remarkable in favor of me to have a web site, which is useful in favor of my knowledge.
thanks admin
Spot on witɦ this ԝrite-up, ӏ гeally ƅelieve tɦis amazing site neeԁs a grеat deal more attention. I’ll probably bе returtning to reaԀ mοre, thanks fоr tҺe іnformation!
My partnerr and I stumbled over here from a different
web page aand thought I might as well check things
out. I like what I see so noww i’m following you.
Look forward to going over yoiur web page foor a second time.
Hey I know this is off topic but I was wondering if you knew
of any widgets I could add to my blog that automatically tweet my newest twitter
updates. I’ve been looking for a plug-in like this for quite some time and was hoping maybe you would have some experience
with something like this. Please let me know if you run into anything.
I truly enjoy reading your blog and I look forward to your new
updates.
When someone writes an article he/she maintains the image of a user in his/her brain that how a user can be aware of it.
Therefore that’s why this paragraph is outstdanding.
Thanks!
Excellent blog here! Also your website loads up very fast!
What web host are you using? Can I get your
affiliate link to your host? I wish my website loaded up as quickly as yours lol
I read this paragraph completely on the topic of the comparison of latest and
preceding technologies, it’s remarkable article.
Great post.
Hey would you mind stating which blog platform
you’re using? I’m planning to start my own blog soon but I’m having a difficult time choosing between BlogEngine/Wordpress/B2evolution and Drupal.
The reason I ask is because your layout seems different then most blogs and I’m looking for something completely unique.
P.S Sorry for getting off-topic but I had to ask!
Everything is very open with a clear description of the issues.
It was definitely informative. Your site is useful. Many thanks for sharing!
Write more, thats all I have to say. Literally, it seems as though you relied on the
video to make your point. You clearly know what youre talking
about, why waste your intelligence on just posting videos to your site when you could be giving us something enlightening
to read?
I was wondering if you ever considered changing the
layout of your blog? Its very well written; I love what youve
got to say. But maybe you could a little more in the way of content
so people could connect with it better. Youve got an awful lot of text for only having 1 or 2 pictures.
Maybe you could space it out better?
Thank you for the feedback! I’m working on it – Nitin Garg, Author
Please let me know if you’re looking for a article author for
your site. You have some really great articles and I feel I would be a good asset.
If you ever want to take some of the load off, I’d absolutely love
to write some articles for your blog in exchange
for a link back to mine. Please shoot me an e-mail if interested.
Thank you!
Thank you for the offer! I’d be looking for Writers for my website after 6 months. I’ll keep you in mind – Nitin Garg, Author
Hi there, You’ve done a great job. I’ll definitely digg it and personally suggest to my friends.
I am sure they’ll be benefited from this website.
We’re a group of volunteers and starting a
new scheme in our community. Your website provided us with valuable information to work on. You’ve done a formidable job and our entire community will be grateful to you.
I’m honored. Thank you!
It’s not my first time to pay a quick visit this web page,
i am browsing this site dailly and get nice information from here everyday.
Appreciating the time and energy you put into your blog
and detailed information you present. It’s awesome
to come across a blog every once in a while that isn’t
the same old rehashed information. Excellent read! I’ve saved
your site and I’m adding your RSS feeds to my Google
account.
Thank you for the appreciation!
My brother recommended I might like this web site.
He was entirely right. This post actually made my day.
You can not imagine simply how much time I had spent for this information! Thanks!
Appreciate the recommendation. Will try it out.
Hey there would you mind sharing which blog platform you’re
using? I’m going to start my own blog soon but
I’m having a difficult time choosing between BlogEngine/Wordpress/B2evolution and Drupal.
The reason I ask is because your design and style seems different then most blogs and I’m looking for something
unique. P.S My apologies for being off-topic but I had to ask!
Hey very nice blog!
I was suggested this blog through my cousin. I’m now not certain whether or not this put
up is written by way of him as nobody else recognize such specified about my difficulty.
You’re wonderful! Thank you!
With havin so much content do you ever run into any problems of plagorism or
copyright infringement? My blog has a lot of completely unique content I’ve either created myself or outsourced but it appears a lot of it is popping it up
all over the web without my agreement. Do you know any methods to help protect against content from
being stolen? I’d truly appreciate it.
Hello, every time i used to check weblog posts here
in the early hours in the morning, because i like to learn more and more.
When someone writes an post he/she retains the plan of a user
in his/her mind that how a user can be aware of it. Thus that’s
why this piece of writing is outstdanding. Thanks!
Hi, I desire to subscribe for this weblog to take newest updates, therefore where can i do it
please help.
You can register your e-mail address under “FOLLOW BLOG VIA EMAIL” (found at the right below “ARCHIVES”). You will receive an email from my blog, requesting you to confirm your subscription. Once done, all my latest posts will come directly to your inbox
You can also like us in Facebook: https://www.facebook.com/pages/Gargfinanceblog/1598744910372287
You may also follow me at Twitter: https://twitter.com/nitau_gg
Hello there, just became alerrt to your blog through Google,
and found thuat it’s truly informative. I am going to watch out for brussels.
I’ll appreciate if you continue this in future. Lots of people
will be benefited from your writing. Cheers!
Hmm it appears like yoսr website ate mʏ first сomment (іt
ѡɑѕ super long) so I guess I’ll јust sum іt up what I haad
աritten and say, I’m thorօughly enjoying yоur blog.
I tоо ɑm an aspiring blog blogger Ƅut І’m stіll
neԝ tо everʏthing. Do you have any suggestions fօr beginner blog writers?
Ι’d genuinely ɑppreciate іt.
hello there and thank you for your information –
I’ve certainly picked up anything new from right here.
I did however expertise a few technical points using this web site, since I experienced to reload the web site a lot
of times previous to I could get it to load correctly. I had been wondering if your web hosting is OK?
Not that I am complaining, but sluggish loading instances times will
sometimes affect your placement in google and could damage your high quality
score if advertising and marketing with Adwords.
Anyway I am adding this RSS to my email and could look out for much more of your respective fascinating content.
Make sure you update this again soon.
Appreciate your feedback. I’m working on it – Nitin Garg, Owner & Author
Amazing blog! Is your theme custom made or did you download it from somewhere?
A theme like yours with a few simple adjustements would really make my blog shine.
Please let me know where you got your theme. Cheers
Hey there would you mind stating which blog platform you’re working with?
I’m planning to start my own blog in the near future
but I’m having a difficult time deciding between BlogEngine/Wordpress/B2evolution and
Drupal. The reason I ask is because your design seems
different then most blogs and I’m looking for something
completely unique. P.S Sorry for being off-topic but I had to ask!
Excellent post. I was checking continuously this blog and I am impressed!
Very helpful info specially the last part 🙂 I care for such information a lot.
I was looking for this particular info for a very long time.
Thank you and good luck.