Dynamic Risk Factors in Expedition of Capital Asset Pricing Model for Measuring Required Rate of Return Intended for Equity Valuation

Abstract

Investment in shares of the company has its own charm. Investors can invest in many financial instruments including equity shares of public limited companies. However, unlike debt instrument, it’s very difficult to decide the required rate of return for investing in equity share mainly because uncertainty attached to the market return and systematic risk possessed by the company under consideration. CAPM model establishes a link between Risk and Required return for investing in equity and this rate is being considered while carrying out valuation of equity. CAPM converts the risk-return relationship into a formula, where in, the risk factors and their weightage are put on one side and required return, to justify the risk being taken, is derived on another side. CAPM initially considered ‘Market’ as the only risk factor and this risk was denoted by beta(β). later, different researchers developed many variants of CAPM such as Zero beta CAPM, CCAPM, ICAPM. Over a period, like Assets Pricing Model, Basic CAPM formula also added many other risk factors namely, size, momentum, liquidity, investment, and profitability. The present research paper tries to trace the journey of CAPM from One Factor to six factor model. The author will discuss various variants of CAPM, journey of CAPM, some crucial conceptual as well as empirical studies which either supported or opposed these models.