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Rf = Risk-free Rate. Rm – Rf) = Equity MarketRiskPremium. Cp = Cost of Equity Premium. Risk free rate (can use 10y Treasury). Market Return. The details of how the CAPM works is beyond the scope of this article but in short, the formula is as follows: Ce = Rf + B x (Rm – Rf) + Cp.
In the first five posts, I have looked at the macro numbers that drive global markets, from interest rates to riskpremiums, but it is not my preferred habitat. The second set of inputs are prices of risk, in both the equity and debt markets, with the former measured by equity riskpremiums , and the latter by default spreads.
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