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Estimating Discount Rates🔵 Intermediate

Is This Stock Giving You Fair Returns for the Risk?

What Return Should You Demand for This Stock?

The Capital Asset Pricing Model (CAPM) links systematic risk (beta) to the minimum required return. It is the most widely used model in finance.

CAPMCost of EquityBetaRequired Return

Live Result

11.10%

ƒ: rf + beta * (rm - rf)raw: 0.111000

ƒ(x)

Use variable names from the panel above (e.g. FV, r, n) — or type numbers directly: 10000 / (1 + 0.08)^10

rf% as decimal

Risk-free rate (decimal)

rf = 0.04

beta% as decimal

Systematic risk measure

beta = 1.2

rm% as decimal

Expected market return (decimal)

rm = 0.10

💡 You can also enter values directly in the formula: 10000 / (1 + 0.08)^10

⬇ Export Calculation

Exports a plain .txt file with your expression, formula, all variable values, result, and educational notes — ready to paste into any report, Word doc, Notion, or Google Docs.

The exported file includes the formula in standard mathematical notation — you can paste it directly into Excel, Google Sheets, or back into FinanceSheep.

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Learn: What Return Should You Demand for This Stock?

Estimating Discount Rates · Educational Guide

The Core Idea

Before you invest in a stock, you need to know: given this stock's risk, what return should I demand? CAPM gives you a precise answer based on three inputs you can look up.

How It Works

Cost of equity = rf + β × (rm − rf). The market risk premium (rm − rf) is what the market pays above safe bonds. Beta scales this premium up or down depending on your stock's systematic risk. If beta = 2, your stock should deliver twice the market risk premium.

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Real-World Example: rf = 4%, rm = 10%, beta = 1.2: Cost of equity = 4% + 1.2 × (10% − 4%) = 4% + 7.2% = 11.2%. This is the minimum annual return you should expect from this stock to justify its risk.

Is This Stock Giving You Fair Returns for the Risk?

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