The core relationship
The basic capital asset pricing model expresses cost of equity as: risk-free rate + beta × equity market risk premium. The premium represents the expected return above the risk-free rate. Beta relates an investment’s sensitivity to market movements; it does not capture every risk facing a business.
Inputs require judgement
The risk-free reference, market premium and beta should be appropriate to the currency, market evidence and valuation date. For an unlisted business, comparable-company evidence may inform beta, with attention to differences in operating and financing risk.
A model, with limitations
Historical estimates can be unstable and comparable businesses are rarely identical. Any additional adjustments need clear support and consideration of overlap with other assumptions. CAPM provides a structured starting point, while the resulting rate still needs commercial and methodological scrutiny.
Further reading
NYU Stern · Valuation resources (opens in a new tab)For general understanding. The appropriate method, professional appointment and regulatory treatment depend on the purpose, date and circumstances of the engagement.