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Hi Sir,
As part of the ARM lecture – “The capital asset pricing model (part 1)”, you mentioned that in real life analysts use the CAPM to calculate the average Beta over a period of time (such as a year) as the market average return and the share prices (hence the cost of equity or the E(ri) ) change.
I am little confused because I thought we wouldn’t be able to derive the share price unless we have the cost of equity (and the future expected dividend), yet this cost of equity depends on the Beta. Therefore it seems to me there is interdependency between the E(ri) and the Beta.
Can you please advise? Fully aware this is not part of the exam but just wanted to have more understanding.
Thanks in advance and your lectures are wonderful!
Kind Regards,
TimThis only applies to quoted shares, and just as the shareholders required return should change as the market return changes (depending on the beat of the share), so too (over the long term) should the market price of the share change as the stock market index changes. Both of the market price of the shares and the stock exchange index are published each day.
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