# Cost of Equity (CAPM)

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r_a =
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MichaelBartmess.Cost of Equity (CAPM)
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This equation computes the cost of equity ( r_a) for an individual asset, an individual security or portfolio.

## INPUTS

• beta - the factor representing systemic risk, the asset's vulnerability to broad market effects.
• r_f - the risk free rate of interest such as expected lowest risk assets such as government bonds
• r_m - expected market return

## NOTES

This equation is part of the Capital Asset Pricing Model (CAPM).  This equation draws a relationship between expected return and systemic risk, beta (beta), to compute a theoretically appropriate required rate of return of an asset. That is the relationship represented as the return a stockholder should expect.

The cost of equity represents the cost required in exchange for owning the asset and bearing the risk of ownership.

## REFERENCE

[1] Capital asset pricing model
Source: Wikipedia