Cost of equity (CAPM)
Estimate the required equity return using the market-risk model (CAPM).
What the figures mean
- Required return on equity (CAPM)
The model adds a risk-free rate to a market-risk premium adjusted by β. It calculates a required return, not a promised investment gain.
Simple example: Risk-free rate 3%, market return 8%, β = 1.2: 3 + 1.2 × (8 − 3) = 9%.
- Market-risk coefficient (β)
Scales the market-risk part of the required return in the model. It does not predict an exact share-price movement.
Simple example: A 5 percentage-point market premium with β = 1.2 becomes a 6-point premium.