Question

please assist in how to read equation and provide correct answer.

Given the following equation: ??? + (???)? = rs Where in this formula does the

analyst incorporate the risk factor? Please circle variable(s).

Answer 1

rrf + (RPm)B =rs

The above equation is given by Capital Asset pricing model for calculating cost of equity,

here

rs=Cost of equity

rrf= risk free rate of return (usually govt securities return)

RPm= risk premium in the market (MArket rate of return-risk free rate of return)

B=beta of company (corporate risk factor)

How to read the equation- Cost of equity=risk free return+ Additional return available in market over risk free return * risk factor of our company.

Note

Given the mode of communication i am not able to circle the variables,however i have explained all the variables thouroughly.