Capital Asset Pricing Model Calculator (CAPM)

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Capital Asset Pricing Model Calculator (CAPM)
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• 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 )
• where
• 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 SP
  500.

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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.

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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.