Estimating the Return Parameters of the Capital Asset Pricing Model

Abstract

The cost of equity capital is a fundamental concept In the field of finance. Its estimation often relies on the application of the Capital Asset Pricing Model. Very little help is offered to the practitioner in the selection of appropriate values for the parameters of this mode), in particular the risk free rate and the market risk premium. This paper sets out to review the theoretical basis for the selection of these parameters, and to draw together the suggestions offered in the literature for their estimation.