How to calculate expected market return in CAPM model for finding cost of equity?

Question

I have one doubt about CAPM model for calculating cost of equity of any company..

CAPM sates Ke=RFR+beta*(Expected market return-RFR)

Can anybody please tell me what exactly is expected market return and how to calculate it ????

Is it arithmetic mean of historical returns of market or any other thing ???

TIA

Answer 1

If you are using this personally, then you can drop it.  I have recently written a proof that the Expected Return cannot be estimated by any means, that it is a mathematical impossibility.  The CAPM is tautologically true, but it can be shown that the limitations upon it make it useless for use in Finance.  It will still hold great importance in economics because there are behavioral implications to it, but its value as a tool is nil.  The reason and the mathematics are too complex for Yahoo Answers if for no other reason that you cannot put the symbols in the text.  If this is for a class, then you should find a good proxy variable for the market of all risky assets, including real estate and foreign securities, and find its historical geometric return over inflation.

Answer 2

According to CAPm, the Market Rate of return is the rate of return of the Market Portfolio. The market porfolio corresponds to a portfolio consisting of every risky asset in the market and the expected rate of return that the market will provide for it.

I know it sounds subjective, but without understanding the context of your question, it is difficult to elaborate. If you are looking to solve a homework problem, in most cases the rate will be provided to you. If not, you should look more into the CAPm model.