[Verse 1] When investors put their money down They want a fair return that's sound The cost of equity we must find To value companies in our mind CAPM is the way we go Three simple numbers help us know [Chorus] Risk-free rate plus beta times the premium That's the formula we're singing R-F plus beta times the spread Cost of equity in your head Government bonds give us the floor Beta and premium give us more [Verse 2] Risk-free rate is where we start Government bonds play that part Treasury bills or ten-year notes Safe returns that everyone knows Zero risk but low reward This becomes our baseline board [Chorus] Risk-free rate plus beta times the premium That's the formula we're singing R-F plus beta times the spread Cost of equity in your head Government bonds give us the floor Beta and premium give us more [Verse 3] Beta measures company risk Compared to market's up and down twist If beta's one then moves the same Less than one is a calmer game Greater than one means higher swings Volatility is what beta brings [Bridge] Market risk premium shows the gap Between the market and risk-free cap Investors need that extra pay For taking risk along the way Historical data helps us see What that premium ought to be [Chorus] Risk-free rate plus beta times the premium That's the formula we're singing R-F plus beta times the spread Cost of equity in your head Government bonds give us the floor Beta and premium give us more [Verse 4] Put it all together now CAPM shows us exactly how Add risk-free to beta's might Times the premium done just right Cost of equity crystal clear For every company we engineer [Outro] Three percent risk-free we see Beta one-point-two for me Market premium five percent Six percent is what we're sent Three plus one-point-two times five Nine percent keeps firms alive
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