Apple CAPM | Valurator

For informational and educational purposes only • Not investment advice.

Apple

iPhone, services, devices

Expected Return

10.3%

β: 1.17

Average market risk

CAPM estimates the annual return investors expect and require for owning a company's stock based on its market risk.

How the Expected Return (Cost of Equity) is Built

Expected Return (Cost of Equity) = Risk-Free Rate + β × Equity Risk Premium

Risk-Free Rate

Yield on a long-term government bond used as the risk-free-rate benchmark.

4.5%

Stock Risk Premium

β × Equity Risk Premium = 1.17 × 5.0%

5.8%

Cost of Equity

Minimum annual return shareholders expect.

10.3%

Risk-Free Rate

4.5%

Stock Risk Premium

5.8%

Expected Return

10.3%

Key CAPM Metrics

Risk-Free Rate

Range: 0–20%

Equity Risk Premium

Range: 0–20%

Notes

• The risk-free rate has been manually adjusted to 4.5%. The original benchmark source was the U.S. 10-Year Treasury yield published by the Federal Reserve Board.

How CAPM Works

The Capital Asset Pricing Model (CAPM) estimates how much return investors require before they are willing to invest in a company's stock. Companies with higher market risk must offer a higher return to attract investors. From an investor's perspective, this required return is the stock's Expected Return. In business valuation, the same return is used as the company's Cost of Equity.

CAPM assumes that investors hold the fully diversified market portfolio. This means that company-specific risks can be diversified away and therefore do not affect the return investors require. Instead, investors are rewarded only for market risk—the risk that affects the overall market. Beta measures how much market risk a stock has, while the Equity Risk Premium determines how much additional return investors require for taking that risk.

CAPM Formula

\text{Expected Return} = R_f + \beta \left( R_m - R_f \right)

where R_f is the Risk-Free Rate, β is Beta, and (R_m − R_f) is the Equity Risk Premium.

Key Model Assumptions

• Investors are assumed to hold a fully diversified market portfolio.
• Company-specific risk can be diversified away, so investors are compensated only for systematic market risk.
• Beta is used to measure the stock's exposure to systematic market risk.
• The Risk-Free Rate represents the return available without taking equity market risk.
• The Risk-Free Rate is based on the U.S. 10-Year Treasury yield published by the Federal Reserve Board.
• The Equity Risk Premium represents the additional return investors require for bearing market risk.
• Beta and market assumptions may change over time, so the estimated Expected Return may not remain representative of future required returns.

Step 1 — Measure Market Risk (β)

β = Covariance(Stock, Market) / Variance(Market)

Measures the sensitivity of the stock's returns to changes in the return of the market portfolio.

β = 1.17

For Apple, a beta of 1.17 indicates how sensitive the company's stock has historically been to movements in the overall market.

CAPM assumes that investors hold the fully diversified market portfolio. This means company-specific risks can be diversified away and therefore do not affect the return investors require. Instead, investors are rewarded only for market risk—the risk that affects the overall market. Beta measures how sensitive a company's stock has historically been to movements in the overall market. A beta of 1.17 means that Apple's stock has historically moved about 1.17 times as much as the overall market.

Step 2 — Apply the CAPM Formula

Expected Return (Cost of Equity) = Risk-Free Rate + β × Equity Risk Premium

Expected Return (Cost of Equity) = 4.5% + 1.17 × 5.0% = 10.3%

Start with the Risk-Free Rate of 4.5%, based on the the U.S. 10-Year Treasury yield published by the Federal Reserve Board. Next, calculate the company's Stock Risk Premium by multiplying its beta of 1.17 by the Equity Risk Premium of 5.0%. Adding the Stock Risk Premium to the Risk-Free Rate gives an Expected Return of 10.3%, also known as the company's Cost of Equity.