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Capital Assets Pricing Model
CAPM = Capital Asset Pricing Model.
A method used for evaluating investment opportunities, where the Risk Free Rate is added to the Risk Premium.
R = RF + B (RM - RF)
Where:
R = Expected Rate of Return (The minimum return an investor will accept for said investment)
RF = Risk Free Rate (Usually Interest on Treasury Bills are loosely used)
RM = Market Return (Average Return Generated by the Market)
B = Beta Co-efficient (Volatility of Returns of a Security of Portfolio)
Generally speaking, a solid investment is one which generates higher returns than investments carrying the same level of risk.
Cost of equity is basically what it costs the company to maintain a share price that is satisfactory (at least in theory) to investors. The most commonly accepted method for calculating cost of equity comes from the Nobel Prize-winning
CAPITAL ASSET PRICING MODEL(CAPM),
