The Capital Pricing Asset Model (CAPM) is frequently used to estimate a firm's cost of equity. a) use own words, explain how CAPM works. (3 marks) b) How do we derive a firm's equity beta? What happens to the required rate of return of the firm's equity if the firm's equity beta increases, all else equal? (2 marks) c) What is the market risk premium? What happens to the required rate of return of the firm's equity if the overall market enters a period of lower volatility, all else equal? (2 marks)

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a The Capital Asset Pricing Model CAPM is a financial model that helps estimate the expected return ... View the full answer