The situation
The assumed risk-free rate is 6.5% and equity risk premium is 5%. Peer A beta is 0.8 and peer B beta is 1.3.
Your task
Calculate both CAPM estimates and explain the difference.
Reveal step-by-step solution
Set up the problem
Apply the same currency, risk-free rate and market premium to each beta.
Work through the numbers
A = 6.5% + 0.8 × 5% = 10.5%. B = 6.5% + 1.3 × 5% = 13.0%.
Interpret the result
The 2.5 percentage point gap reflects estimated exposure to market risk. Check leverage and beta estimation before setting the hurdle.
What to remember
Beta measures market sensitivity. Keep the risk premium and risk-free rate on a consistent basis.