How this number is made
The capital asset pricing model says the required return is the risk-free rate plus beta times the market’s extra return. Beta and the market return are assumptions. A beta from last year’s prices is not a promise about next year. This is a sketch used in class and in a discount rate, not a forecast.
- Beta of 1 moves with the market. Above 1 is a wider swing.
- The market return should be an expectation, not last year’s result, unless you mean to use last year.
Formula
Required return = risk-free rate + beta × (market return − risk-free rate).
Worked example
With the figures already in the form, required return is 10.00%.
Questions
Is this the return I will get?
No. It is the return the model says the risk requires. Realized returns wander off it constantly.
Can I use it as a discount rate?
People do, for equity. A project’s discount rate may also need the debt side. That is the WACC page.