CAPM Capital Asset Pricing Model in 3 minutes (YouTube Video Below)

3 Minute Overview (Also Download Free Cheet Sheet at Bottom) and then scroll down for detailed calculations video

Part 1

Part 2

Beta for CAPM Premium Video (Free Preview)

Beta Levered vs. Unlevered Premium Video (Free Preview)

Arbitrage Pricing Theory vs. CAPM Premium Video (Free Preview)

Arbitrage Pricing Theory and Idiosyncratic Risk Premium Video (Free Preview)

Arbitrage Pricing Theory and Portfolio Diversification Premium Video (Free Preview)

To Watch FULL Premium videos Click Here

 Download FREE Cheat-Sheet PDF on CAPM click here

 

  • CAPM is just a “model” or formula used to calculate COST OF EQUITY

 

  • Cost of Equity is how much an investor “wants” to earn for investing in a company which is more risky than a safe bank deposit (or government bond), and (usually) more risky than investing in the general stock market with a bunch of stocks.

 

  • It’s called a “cost” because that’s how much you should “fairly” pay your investors for investing in your risky company.

 

 

  • CAPM assumes that investing in many stocks is safer than investing in just one company’s stock: “don’t put all your eggs in one basket” sorta thing.. this is called “diversified” risk

 

  • Rationale: An investor would “want” (or “expect”) more income (“return”) for investing in a highly risky company instead of the zero-risk  bank/bond, and also instead of investing in a “medium-risk” general stock market.  Therefore, cost of equity = “expected return”

 

You calculate Cost of Equity using the CAPM or Capital Asset Pricing Model Formula:

Ke = Rf + B (Rm-Rf)

DON’T panic! It’s MUCH  EASIER than it looks! See this formula step-by-step in action, watch it for free in the video above.

CAPM Capital Asset Pricing Model

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34 Comments

  • Pretty insightful post. Never thought that it was this simple after all. I had spent a superior deal of my time looking for someone to explain this topic clearly and you’re the only one that ever did that. Kudos to you! Keep it up

  • Thanks for all your efforts that you have put in this. very interesting info .

  • aceoftrumps

    Reply Reply 2 May 2012

    Amazing. Understanding what I can’t seem to translate form a text book through your presentations. Thank you!!

    • David

      Reply Reply 8 May 2012

      Glad you find something to help you with your textbook!

  • Zbigniew

    Reply Reply 22 May 2012

    Great and easy explained, says a lot about the knowledge of the lector

  • Titus Miranyi

    Reply Reply 29 May 2012

    WONDERFUL PRESENTATION.KEEP IT UP.

  • LISA TAYLOR

    Reply Reply 20 June 2012

    What a fantastic website. Thank you so much for explaining this in such a simple easy to follow way. It has helped me so much.

    The only thing I got lost on was how did you get to 8.6% on the CAPM calculation as I keep getting 6.72
    because 0.02+1.1(0.08-0.02) = 1.12 x0.06 doesnt it?

    • David

      Reply Reply 21 June 2012

      Hello Lisa. You must first multiply the 1.1 with the 0.06 before adding it to the 0.02 🙂

  • LISA TAYLOR

    Reply Reply 24 June 2012

    Thank you so much – what a fantastic site

  • Nitin

    Reply Reply 14 July 2012

    Its so cool…..thanks for the great videos…….can we get into some practice videos on the topics like CAPM, WACC, derivatives products….please let me know..ll be very glad to hear back from you…thank you genius 😉

    • David

      Reply Reply 15 July 2012

      These videos are all I have for now, but thanks for calling me a genius, Nitin!

  • Sione

    Reply Reply 6 October 2012

    Unbelievable!! It’s been 7 weeks now of my semester and I do not understand a thing about CAPM, WACC, NPV etc until I come across these website!!! man!! you got rid of my bullshit mind of not understanding these topics anymore…thanks so much and keep up the good work!

    • David

      Reply Reply 7 October 2012

      Hope you understand it now, Sione!

  • saeed

    Reply Reply 6 January 2013

    thanks for all…this way of teaching can cover a huge gap in education…it is our habit not to understand what professors say! imagine what watching these videos can do before going to class…how much more productive everyone can be in the classroom !!!!

    • David

      Reply Reply 7 January 2013

      Hey Saeed, glad you’re a lot more productive now! Cheers.

  • Mimi

    Reply Reply 23 March 2013

    Your videos saved me a lot of sleepless nights beating hard-to-read text books.

    • David

      Reply Reply 26 March 2013

      @Mimi glad to hear that… I love sleep too!

  • Sharon Thomas

    Reply Reply 24 March 2013

    Hi, I found these videos to be of great help, its my second attempt at this course and now beginning to experience the difficult part i.e. the WACC and CAPM, then I stumbled on these videos. What a life saver indeed !!!! Thumbs up>

    • David

      Reply Reply 26 March 2013

      Thumbs up to you too, Sharon! Glad your life is saved!

  • hong

    Reply Reply 24 March 2013

    hi, can i ask some question? something about dividend discount model. can u explain why (r-g) will appear in this model? why not we use (r+g) in this model? thanks… appreciate it ^^

  • tushar

    Reply Reply 20 October 2014

    life looks easy after watching the video… thanks 🙂

    • David

      Reply Reply 21 October 2014

      @tushar you’re welcome!

  • Egle

    Reply Reply 12 November 2014

    I probably will finish my bullshit Master thanks to you!!!
    This is such a bullshit! :))

    • David

      Reply Reply 15 November 2014

      @Egle good luck in your master!

  • Luiza

    Reply Reply 15 December 2014

    this was truly amazing explanation!

    • David

      Reply Reply 18 December 2014

      @Luiza glad you found it easy to understand!

  • Mohammed Berrezzel

    Reply Reply 20 December 2014

    thank you very much for these lectures, you are better than some lecturers in my universirty

    • David

      Reply Reply 21 December 2014

      @Mohammed hope you’re doing great at university!

  • Lucilio

    Reply Reply 9 April 2015

    This is great! Congrats and thank you 1

    • David

      Reply Reply 10 April 2015

      @Luiclio happy to know you find it great!

  • SOL

    Reply Reply 31 October 2015

    So helpful. Thank you so much David!

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