Cost of Equity (CAPM)

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Equation / Last modified by mike on 2015/07/29 06:45
`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
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