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Risk and return II: CAPM and the cost of capital
- Required returns
- CAPM: Overview
- CAPM: Interpretation
- CAPM: Two issues
- CAPM: Estimating the risk-free rate
- CAPM: Estimating the market risk premium
- CAPM: Estimating beta
- CAPM: Application
- The cost of capital
- The big picture
- Excel section
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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