What is CAPM Model?
The Capital Asset Pricing Model (CAPM) estimates the expected return on an asset as the risk-free rate plus a risk premium proportional to its beta — the asset’s sensitivity to market movements.
How It Works
- Take the risk-free rate.
- Add beta × (expected market return – risk-free rate).
- Use the output as the cost of equity in valuation.
Saudi Context
Saudi equity analysts use CAPM with a SAR risk-free rate (Saudi government bonds), Tadawul-based market premium, and sector betas. Country risk is often embedded via an adjusted ERP.
Example
A Saudi stock has beta 1.2, risk-free 4.5%, market premium 6%. Expected return is 4.5% + 1.2 × 6% = 11.7%.