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The discount rate effectively encapsulates the risk associated with an investment; riskier investments attract a higher discount rate. Different types of discount rates such as risk-freerate, cost of equity, or cost of debt, are used contextually in financial analysis.
Definition of Capital Asset Pricing Model. It helps an investor understand what to expect to earn in relation to the risk-freerate and the market return. CAPM assumes that the minimum a rational investor would earn is the risk-freerate by buying the risk-free asset. E(r) = Rf + ??
What is a hurdle rate for a business? There are multiple definitions that you will see offered, from it being the cost of raising capital for that business to an opportunity cost , i.e., a return that you can make investing elsewhere, to a required return for investors in that business.
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