3 Minute Overview (Also Download Free Cheet Sheet at Bottom) and then scroll down for detailed calculations video
Part 1
Part 2
Beta for CAPM Premium Video (Free Preview)
Beta Levered vs. Unlevered Premium Video (Free Preview)
Arbitrage Pricing Theory vs. CAPM Premium Video (Free Preview)
Arbitrage Pricing Theory and Idiosyncratic Risk Premium Video (Free Preview)
Arbitrage Pricing Theory and Portfolio Diversification Premium Video (Free Preview)
To Watch FULL Premium videos Click Here
Download FREE Cheat-Sheet PDF on CAPM click here
- CAPM is just a “model” or formula used to calculate COST OF EQUITY
- Cost of Equity is how much an investor “wants” to earn for investing in a company which is more risky than a safe bank deposit (or government bond), and (usually) more risky than investing in the general stock market with a bunch of stocks.
- It’s called a “cost” because that’s how much you should “fairly” pay your investors for investing in your risky company.
- In more complicated problems, you include the cost of equity as part of your WACC or Weighted Average Cost of Capital
- CAPM assumes that investing in many stocks is safer than investing in just one company’s stock: “don’t put all your eggs in one basket” sorta thing.. this is called “diversified” risk
- Rationale: An investor would “want” (or “expect”) more income (“return”) for investing in a highly risky company instead of the zero-risk bank/bond, and also instead of investing in a “medium-risk” general stock market. Therefore, cost of equity = “expected return”
You calculate Cost of Equity using the CAPM or Capital Asset Pricing Model Formula:
Ke = Rf + B (Rm-Rf)
DON’T panic! It’s MUCH EASIER than it looks! See this formula step-by-step in action, watch it for free in the video above.
36 Comments
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22 October 2011Pretty insightful post. Never thought that it was this simple after all. I had spent a superior deal of my time looking for someone to explain this topic clearly and you’re the only one that ever did that. Kudos to you! Keep it up
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28 October 2011Thanks for all your efforts that you have put in this. very interesting info .
aceoftrumps
2 May 2012Amazing. Understanding what I can’t seem to translate form a text book through your presentations. Thank you!!
David
8 May 2012Glad you find something to help you with your textbook!
Zbigniew
22 May 2012Great and easy explained, says a lot about the knowledge of the lector
Titus Miranyi
29 May 2012WONDERFUL PRESENTATION.KEEP IT UP.
David
5 June 2012THANKS Titus!
LISA TAYLOR
20 June 2012What a fantastic website. Thank you so much for explaining this in such a simple easy to follow way. It has helped me so much.
The only thing I got lost on was how did you get to 8.6% on the CAPM calculation as I keep getting 6.72
because 0.02+1.1(0.08-0.02) = 1.12 x0.06 doesnt it?
David
21 June 2012Hello Lisa. You must first multiply the 1.1 with the 0.06 before adding it to the 0.02 🙂
LISA TAYLOR
24 June 2012Thank you so much – what a fantastic site
David
29 June 2012great to hear that, Lisa!
Nitin
14 July 2012Its so cool…..thanks for the great videos…….can we get into some practice videos on the topics like CAPM, WACC, derivatives products….please let me know..ll be very glad to hear back from you…thank you genius 😉
David
15 July 2012These videos are all I have for now, but thanks for calling me a genius, Nitin!
Sione
6 October 2012Unbelievable!! It’s been 7 weeks now of my semester and I do not understand a thing about CAPM, WACC, NPV etc until I come across these website!!! man!! you got rid of my bullshit mind of not understanding these topics anymore…thanks so much and keep up the good work!
David
7 October 2012Hope you understand it now, Sione!
saeed
6 January 2013thanks for all…this way of teaching can cover a huge gap in education…it is our habit not to understand what professors say! imagine what watching these videos can do before going to class…how much more productive everyone can be in the classroom !!!!
David
7 January 2013Hey Saeed, glad you’re a lot more productive now! Cheers.
Mimi
23 March 2013Your videos saved me a lot of sleepless nights beating hard-to-read text books.
David
26 March 2013@Mimi glad to hear that… I love sleep too!
Sharon Thomas
24 March 2013Hi, I found these videos to be of great help, its my second attempt at this course and now beginning to experience the difficult part i.e. the WACC and CAPM, then I stumbled on these videos. What a life saver indeed !!!! Thumbs up>
David
26 March 2013Thumbs up to you too, Sharon! Glad your life is saved!
hong
24 March 2013hi, can i ask some question? something about dividend discount model. can u explain why (r-g) will appear in this model? why not we use (r+g) in this model? thanks… appreciate it ^^
tushar
20 October 2014life looks easy after watching the video… thanks 🙂
David
21 October 2014@tushar you’re welcome!
Egle
12 November 2014I probably will finish my bullshit Master thanks to you!!!
This is such a bullshit! :))
David
15 November 2014@Egle good luck in your master!
Luiza
15 December 2014this was truly amazing explanation!
David
18 December 2014@Luiza glad you found it easy to understand!
Mohammed Berrezzel
20 December 2014thank you very much for these lectures, you are better than some lecturers in my universirty
David
21 December 2014@Mohammed hope you’re doing great at university!
Lucilio
9 April 2015This is great! Congrats and thank you 1
David
10 April 2015@Luiclio happy to know you find it great!
SOL
31 October 2015So helpful. Thank you so much David!
David
31 October 2015@SOL you’re welcome!
Tsotetsi Thuso
30 May 2023I don’t know how to think you but you may have saved my life and time, lot of love from me to you.
David
30 May 2023Glad to have saved your time Tsotetsi!
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