Capital asset pricing model

In this lesson

1. 0:00 Capital Asset Pricing Model introduction
2. 0:29 Systematic and unsystematic risk explained
3. 1:33 Beta factor and share sensitivity
4. 3:19 CAPM formula and components
5. 4:03 Risk-free rate and market return
6. 4:46 Worked example: calculating cost of equity
7. 6:32 CAPM advantages and limitations
8. 7:25 Practice question: CAPM statements

About this lesson

The lesson breaks down how CAPM works by first distinguishing between systematic risk (market-wide risk you can't diversify away) and unsystematic risk (company-specific risk that diversification can reduce). You'll understand beta, the key measure that shows how sensitive a share is to overall market movements. A beta of 1 means the share moves with the market; higher than 1 means more volatility and risk; lower than 1 means less volatility and lower risk. You'll work through the CAPM formula step by step: expected return on equity equals the risk-free rate plus beta multiplied by the market risk premium. The lesson includes a worked example calculating the cost of equity for a company, showing you how to substitute values and interpret the result in context. By the end, you'll see both the practical advantages of CAPM (it doesn't rely on dividend estimates) and its limitations (it uses historical data and assumes perfect markets). This is essential knowledge for understanding how companies determine their cost of capital and how risk translates into required returns — concepts you'll apply across financial management and strategic decision-making questions in your exams.

Duration: 8m