Estimating the Return Parameters of the Capital Asset Pricing Model

Abstract

The cost of equity capital is a fundamental concept In the field of finance. Its estimation often relies on the application of the Capital Asset Pricing Model. Very little help is offered to the practitioner in the selection of appropriate values for the parameters of this mode), in particular the risk free rate and the market risk premium. This paper sets out to review the theoretical basis for the selection of these parameters, and to draw together the suggestions offered in the literature for their estimation.

Keywords:

• Capital Asset Pricing Model
• Cost of Equity
• Risk Free Rate
• Market Risk Premium
• Beta

Additional information

Notes on contributors

Colin Firer

Colin Firer is Dean of the Faculty of Management of the Graduate School of Business Administration at the University of the Witwatersrand.