CAPM model holds that all assets in the market can be combined into a capital market portfolio, which includes all assets in the market, and its proportion is the same as their proportion in the total market value. The risk premium of an asset depends on its market risk coefficient and market risk premium. The market risk coefficient indicates the sensitivity of assets to market portfolio, while the market risk premium indicates the excess return of market portfolio to the risk-free interest rate.
Specifically, to calculate the risk premium of assets, we need to calculate the market risk coefficient (β) of assets, that is, the sensitivity of assets to market portfolio. Then, you can use CAPM formula:
ExpectedReturn=RFRate+β* (market risk premium)
Among them, RFRate stands for risk-free interest rate, and MarketRiskPremium stands for market risk premium, that is, the excess return of market portfolio relative to risk-free interest rate. According to this formula, the expected rate of return required by assets can be calculated, so as to determine its risk premium.
It should be noted that CAPM model has some assumptions, for example, there is a risk-free asset in the market, all investors are rational risk-averse investors, and the market is in an equilibrium state, so it is necessary to consider whether these preconditions are established when using CAPM model to calculate risk premium.