[Verse 1]
When investors want their fair return today
They measure risk in a systematic way
The market holds the key to what they'll earn
Beta shows how much their stocks will turn
[Chorus]
CAPM is the formula we need
Risk-free rate plus beta times the spread
Market premium multiplied by beta's lead
Cost of equity calculated in your head
R equals R-F plus beta times the market spread
[Verse 2]
Treasury bonds give us the risk-free floor
The safest rate that we're accounting for
Market return minus risk-free is the prize
The premium that makes the equity rise
[Chorus]
CAPM is the formula we need
Risk-free rate plus beta times the spread
Market premium multiplied by beta's lead
Cost of equity calculated in your head
R equals R-F plus beta times the market spread
[Bridge]
Beta less than one means lower volatility
Beta more than one brings higher instability
Systematic risk is what we're measuring here
Diversification cannot make it disappear
[Verse 3]
Plot the line from risk-free to the market peak
Security market line is what we seek
Higher beta means a steeper climb ahead
Premium compensation for the risk you'll tread
[Chorus]
CAPM is the formula we need
Risk-free rate plus beta times the spread
Market premium multiplied by beta's lead
Cost of equity calculated in your head
R equals R-F plus beta times the market spread
[Outro]
Required return for equity investment
CAPM gives us the right assessment
Beta times the premium plus the risk-free rate
Cost of equity we can calculate