Both the capital asset pricing model (CAPM) which is based on systematic risk and the risk premium approach which is based on unsystematic risk, have been used to compute expected returns.
As is evident from the literature reviewed, this is perhaps the first time expected Indian stock market returns are presented and computed through both the CAPM and the risk premium approach.
Keywords : CAPM; Risk premium approach; Expected equity returns; DOL, DFL, NSE 500 Index
There appears to be no study estimating expected returns for the Indian stock market based or the risk premium approach (operating leverage and financial leverage).
In total, therefore, we use three models to derive our WACC estimates for GE and Microsoft: (1) the adjusted-beta CAPM, (2) the APM, and (3) the Bond Yield Plus Risk Premium approach
Another possibility for the cooperative financial manager to use is the bond-yield-plus risk premium approach
. It is the simplest to use.
Another approach sometimes used to estimate the cost of equity capital is the risk premium approach
in which investors are assumed to require the average return expected on the average stock.
These factors underlie the weaknesses of an ex post risk premium approach. Still, this method has cognitive appeal due to the almost tangible dimension added by the measurement of risk premiums from observed returns.
Generally, studies supporting an ex ante risk premium approach are based on data from as early as the mid-1960s through the mid-1980s.
The Earnings Incentive Plan option in that case included the provision for an annually authorized rerum on equity range that would span 300 basis points and be based on a risk premium approach that recognizes an inverse relationship between risk premiums and interest rates.