Within the world of business, CAPM can help determine the required return on common stock. The following demonstrates CAPM as a formula calculating the required return for common stock as stated by Block & Hirt (2005), “Kj = Rf + B (Km – Rf), where Kj = Required return on common stock Rf = Risk-free rate of return B = Beta coefficient Km = Return in the as measured by an appropriate index” (p...
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17). The beta coefficient demonstrates an individual stocks return risk history relative to the stock market index. Simply stated, beta measures stock fluctuations with that of the stock market. If the beta is greater than 1, this demonstrates greater risk than the market. ‘A beta less than 1’ demonstrates a lesser risk...
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