Why did you raise Merck’s beta?

A measured beta of 0.22 would give a cost of capital that looks too low for a company facing patent expiries and pipeline risk. 0.60 is a deliberately more cautious assumption.

Where does the market risk premium come from?

We use 4.46%. As a comparison, Damodaran’s implied US premium stood at 4.23% in January 2026.

Does the CAPM actually hold?

It is a model with strong simplifications and disputed in research. In practice it is the common standard because it translates risk into one traceable number. That is why we show the inputs openly.

Knowledge · Cost of capital

Cost of equity and CAPM explained simply

The cost of equity is the return shareholders demand for the risk of a stock. The CAPM calculates it from the risk-free rate, beta and the market risk premium.

At a glance

The risk-free rate is the yield on 10-year US Treasuries.
Beta measures how strongly a stock moves with the market. 1 equals the market, above 1 means stronger swings.
The market risk premium is the excess return of stocks over bonds. We use 4.46%. Damodaran’s implied US premium was 4.23% in January 2026.
The cost of equity is the biggest building block of WACC.

Formula

Ke = rf + β × MRP

rf  = risk-free rate
β   = beta of the stock
MRP = market risk premium

Worked example: three betas (analyses Oct 2026)

	rf	Beta	MRP	Ke	WACC
Merck	4.96%	0.60	4.46%	7.64%	7.20%
Alphabet	4.98%	1.21	4.46%	10.38%	10.06%
Tesla	4.98%*	1.9	4.46%*	≈ 13.45%*	13.2%

*For Tesla the analysis only states beta and WACC. Ke is recalculated here with the same parameters as Alphabet: 4.98% + 1.9 × 4.46% = 13.45%.

CAPM: security market line with Merck, Alphabet and Tesla

Beta is an estimate: the Merck example

Merck’s measured beta was 0.22. With 0.22, Ke would be only 4.96% + 0.22 × 4.46% = 5.94%.
We deliberately raised beta to 0.60: Ke = 7.64%. A beta that is too low would inflate fair value.

Merck: cost of equity at measured and used beta

What the number does

The beta difference between Merck and Tesla accounts for roughly 6 percentage points of WACC (7.20% vs. 13.2%).
The WACC page shows what that means for fair value: for Meta, ±2 percentage points move the value between $474 and $956.

Pitfalls

Beta fluctuates depending on period and index.
A low measured beta does not automatically mean low risk.
The market risk premium is an assumption. Depending on the source it mostly lies between 4% and 6%.
For Germany and Europe a different risk-free rate and premium apply than in the US examples here.

FAQ

Why did you raise Merck’s beta? A measured beta of 0.22 would give a cost of capital that looks too low for a company facing patent expiries and pipeline risk. 0.60 is a deliberately more cautious assumption.
Where does the market risk premium come from? We use 4.46%. As a comparison, Damodaran’s implied US premium stood at 4.23% in January 2026.
Does the CAPM actually hold? It is a model with strong simplifications and disputed in research. In practice it is the common standard because it translates risk into one traceable number. That is why we show the inputs openly.