1. What is the CAPM?

The Capital Asset Pricing Model (CAPM) calculates the expected return on equity or the cost of equity capital. It describes the relationship between systematic risk and expected return for assets, particularly stocks.

2. How Does the Calculator Work?

The calculator uses the CAPM equation:

Where:

• \( R_f \) — Risk-free rate (%)
• \( \beta \) — Beta coefficient (unitless)
• \( R_m \) — Expected market return (%)
• \( (R_m - R_f) \) — Market risk premium

Explanation: The model assumes investors need to be compensated for time value of money (risk-free rate) and systematic risk (beta × market risk premium).

3. Importance of Cost of Equity

Details: Cost of equity is a crucial component in corporate finance for making investment decisions, valuing companies, and determining capital structure.

4. Using the Calculator

Tips: Enter risk-free rate (typically government bond yield), beta (stock's volatility relative to market), and expected market return. All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: What does CAPM calculate monthly?
A: CAPM can calculate monthly expected returns when using monthly risk-free rates, beta, and market returns.

Q2: What are typical values for inputs?
A: Risk-free rate often uses 10-year Treasury yield (~2-5%), beta ranges 0.5-1.5 for most stocks, market return historically ~7-10%.

Q3: What are limitations of CAPM?
A: Assumes perfect markets, single-period horizon, and that beta fully captures risk. May not account for all risk factors in reality.

Q4: How to estimate market risk premium?
A: Historical average difference between market return and risk-free rate, typically 4-6% for US markets.

Q5: When is CAPM most appropriate?
A: For publicly traded companies with established betas, in relatively efficient markets.