Cost of Equity (CAPM)

The cost of equity calculator computes the cost of equity ( `r_a`) for an individual asset, an individual security or portfolio.

INSTRUCTIONS: Enter the following:

• (`beta`)  The factor representing systemic risk, the asset's vulnerability to broad market effects.
• (`r_f`)  The risk free rate of interest such as expected lowest risk assets such as government bonds
• (`r_m`)  The expected market return

Cost of Equit(r_a)"  The calculator returns the value.

The Math / Science

The cost of equity equation is part of the Capital Asset Pricing Model (CAPM).  This equation draws a relationship between expected return and systemic risk, beta (`beta`), to compute a theoretically appropriate required rate of return of an asset. That is the relationship represented as the return a stockholder should expect.

The cost of equity represents the cost required in exchange for owning the asset and bearing the risk of ownership.

REFERENCE

[1] Capital asset pricing model
Source: Wikipedia
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