Risk and return II: CAPM and the cost of capital

It is obvious that investors expect to be compensated with a higher return the higher the risk they are exposed to. The question is, how much more? That is precisely what one of the most widely-used models in finance, the CAPM, is designed to answer. The required return on equity the CAPM enables us to estimate, in turn, is a critical component of the cost of capital, an essential magnitude for every company. These are the issues we’ll discuss in this chapter. ...

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