Re: Cost of equity
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So, how would you calculate a cost of equity without using a beta?
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I'm assuming from your post that you're referring to a single measure of beta used in the CAPM. Actually some equity is notorious for being highly risky but low beta. Gold stocks in particular come to mind. MREITs are another example IMO. I think FatOtt alluded to an arbitrage pricing model where several risk factors are weighted to determine the cost of equity. So.......... it depends on the firm in question. Something like PG, GE, MSFT the CAPM becomes a decent way to arrive at the cost of equity. Other firms that are dependent on the value of a single commodity or highly interest rate sensitive, perhpas a different pricing model is better. Gold stocks and MREITs have relatively low R-Squared values so I would opine that in evaluating whether or not the cost of equity should be determined by the CAPM, one should look at the R-Squared.
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