Capital Asset Pricing Model (CAPM)
CAPM is a financial model that defines the relationship between systematic risk and expected return for an asset. In stock valuation, CAPM is used to calculate the cost of equity — the return required by equity investors given the stock's market risk (beta).
Formula
Example
With a risk-free rate of 4.5% (10-year US Treasury), a market risk premium of 5.5%, and a beta of 1.2, CAPM gives a cost of equity of 4.5% + 1.2 × 5.5% = 11.1%. This becomes the equity component of WACC in stock valuation.
Why It Matters
CAPM provides a theoretically grounded, systematic way to estimate the required return on equity. Without it, the discount rate used in DCF stock valuation would be arbitrary. CAPM links risk and return in a quantifiable way.
How MiniValuator Uses Capital Asset Pricing Model (CAPM)
MiniValuator does not use CAPM in its valuation engine. Rather than deriving a cost of equity from a risk-free rate, beta, and an equity risk premium and rolling it into a WACC, the tool applies a single discount rate that defaults to 10% and can be edited directly. There is no risk-free-rate or market-risk-premium input. CAPM appears here as a core valuation concept, not as a MiniValuator step.
See It in Action
- How the DCF model calculates intrinsic value
- Financial Services sector intrinsic value analysis
- Energy sector intrinsic value analysis
Related Terms
- Weighted Average Cost of Capital (WACC) — WACC is the blended rate of return that a company must earn on its invested capital to satisfy all o...
- Cost of Equity — Cost of equity is the return that equity investors require to compensate them for the risk of invest...
- Beta (β) — Beta measures the sensitivity of a stock's returns to movements in the overall market. A beta of 1.0...
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