1. What is the CAPM Model?

The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk and expected return for assets, particularly stocks. It's widely used in finance to estimate the cost of equity for companies.

2. How Does the Calculator Work?

The calculator uses the CAPM equation:

Where:

• \( R_f \) — Risk-free rate (typically government bond yield)
• \( \beta \) — Beta coefficient (measure of stock volatility relative to market)
• \( R_m \) — 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 risk (beta times market risk premium).

3. Importance of Cost of Equity

Details: Cost of equity is crucial for corporate finance decisions, including capital budgeting, valuation, and determining hurdle rates for investments.

4. Using the Calculator

Tips for India: Use 10-year government bond yield for R_f, Nifty 50 returns for R_m, and company-specific beta (available from financial websites).

5. Frequently Asked Questions (FAQ)

Q1: What's a typical risk-free rate for India?
A: The 10-year Indian government bond yield is commonly used, typically ranging between 6-8% in recent years.

Q2: What does low beta (β < 1) indicate?
A: Low beta stocks are less volatile than the market. They may offer lower returns but with less risk.

Q3: How to estimate market return for India?
A: Historical Nifty 50 returns average about 12-14% annually over long periods.

Q4: What are CAPM limitations?
A: Assumes perfect markets, single-period horizon, and that beta remains constant - which may not hold true.

Q5: When is CAPM most appropriate?
A: Best for large, publicly traded companies with stable betas and when estimating cost of equity in developed markets.