Startup & fundraising
CAPM (Capital Asset Pricing Model)
Formula reviewed by Tahir Asif, CMA
A model that sets the required return on equity as the risk-free rate plus beta times the equity risk premium.
CAPM estimates the return equity investors require: the risk-free rate, plus the stock’s beta times the equity risk premium. Beta measures how much the stock moves with the market. A beta of one earns the market premium, and a higher beta earns more.
Valuers of small private companies often add a size premium and a company-specific premium to the CAPM result, because the model on its own is calibrated on large public companies.
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