Risk-free rate plus a scaled market premium
The capital asset pricing model estimates the return an asset should offer given its market beta. The market risk premium is expected market return minus the risk-free rate. A positive beta above 1 amplifies that premium; a positive beta between 0 and 1 scales it down. A negative beta reverses the premium contribution in the model. Real return removes inflation from a nominal rate. WACC may use this result as the cost of equity. This page does not load Treasury or equity-premium tables.
Expected return = risk-free rate + beta × market risk premium
Example
A 3% risk-free rate, beta 1.3, and 8% expected market return has a 5% market premium. Expected return is 3% + 1.3 × 5% = 9.5%. Beta 0 returns the risk-free rate. CFI’s 2.5% risk-free rate, 1.25 beta, and 7.5% premium (10% market return) is 11.875%.
What this model leaves out
Beta must be between −10 and 10. Size, value, liquidity, and country premia stay outside this single-factor identity. Beta measured from past prices can change with the window. Use a risk-free rate that matches the cash-flow horizon.