CAPM

The Capital Asset Pricing Model is a one-factor framework that decomposes required equity returns into compensation for time (the risk-free rate) plus compensation for systematic risk (beta times the equity risk premium, where ERP equals the market return minus the risk-free rate). CAPM has well-documented empirical limitations — it ignores firm size, value, momentum, profitability, and other documented return factors — but it remains the practical workhorse for estimating cost of equity in equity research because it is parsimonious, transparent, and auditable. Our convention is strict discipline: we use the ten-year Treasury for the risk-free rate, Damodaran's implied ERP for the equity risk premium, and beta computed from a five-year monthly regression against a broad market index. We compute two betas — raw (for the strict cost-of-equity scenario) and adjusted (for the moderate scenario) — to capture the empirical observation that betas tend to mean-revert toward 1.0 over time. CAPM is not the right model for every cash-flow stream (private companies, illiquid assets, distressed equity), but for liquid public-company DCFs it is the default we deviate from only with explicit reasoning.