Using the Capital Asset Pricing Model (CAPM), the cost of common stock equity is the return required by investors as compensation for a firm's nondiversifiable risk.

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The CAPM is a model used to determine the expected return on an asset, including common stock equity. It takes into consideration the expected return on a risk-free asset (such as a government bond), the expected market return, and the beta of the asset in question (which measures its volatility and nondiversifiable risk compared to the overall market). The resulting cost of common stock equity is the return required by investors to compensate for the firm's nondiversifiable risk.

Using the Capital Asset Pricing Model (CAPM), the Cost of Common