1. What is the Capital Asset Pricing Model (CAPM)?

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 determine a theoretically appropriate required rate of return of an asset.

2. How Does the CAPM Calculator Work?

The calculator uses the CAPM equation:

Where:

• \( \text{Risk-Free Rate} \) — Typically the yield on 10-year government bonds (%)
• \( \beta \) — Measure of a stock's volatility compared to the market (unitless)
• \( \text{Market Return} \) — Expected return of the market (%)

Explanation: The model shows that the expected return on equity equals the risk-free return plus a risk premium that depends on the asset's sensitivity to market risk (beta).

3. Importance of Cost of Equity Calculation

Details: Cost of equity is crucial for investment decisions, corporate finance, and valuation. It represents the compensation investors require for taking on the risk of investing in a company's stock.

4. Using the Calculator

Tips: For India, use 10-year government bond yield as risk-free rate, Nifty 50 returns for market return, and stock-specific beta values. All values must be non-negative.

5. Frequently Asked Questions (FAQ)

Q1: What risk-free rate should I use for India?
A: Typically the yield on 10-year Indian government bonds (currently around 7-8%).

Q2: Where can I find beta values for Indian stocks?
A: Financial websites like Moneycontrol, Screener.in, or Bloomberg provide beta values for Indian stocks.

Q3: What market return should I use for India?
A: Historical average return of Nifty 50 (about 12-14% annually over long periods).

Q4: Are there limitations to CAPM?
A: Yes, it assumes perfect markets and that beta fully captures risk. Other models like Fama-French may be more comprehensive.

Q5: How often should I update these inputs?
A: Risk-free rate and beta should be updated regularly (quarterly), while market return can use long-term averages.