The valuation of the capital asset pricing model uses a variation of discounted cash flows. However, there are varied ways to measure the investment beta co efficient. The formula is:
Kc = Rf + beta x ( Km - Rf )
Kc is the risk-adjusted discount rate (also known as the Cost of Capital); Rf is the rate of a "risk-free" investment, i.e. cash; Km is the return rate of a market benchmark, like the S&P 500.
Risk and the Capital Asset Pricing Model Formula
In order to understand the capital asset pricing model calculator; one needs to have an understanding of risk on investment.
Typically, Applicant securities carry a risk of depreciation which is equal to a loss of investment to the investor.
Generally, some securities have more risk than others as compared to the additional risk.
The risk involved when evaluating a particular stock is accounted for in the capital asset pricing model formula with beta.
Beta is the adequate term used to measure the capital asset pricing model formula to evaluate the risk involved with investing in a particular stock relative to the risk of the market.
The beta of the market would be 1. An individual security with a beta of 1.5 would be as proportionally riskier than the market and inversely, a beta of .5 would have less risk than the market.
Alternative Capital Asset Pricing Model Formula
When regression analysis is applied to the capital asset pricing model based on prior returns, the formula will be shown as above. Alpha is considered to be the risk-free rate and epsilon is considered to be the error in the regression.