Which key component should be factored when estimating the cost of equity according to CAPM?

The Capital Asset Pricing Model (CAPM) is used to estimate the expected return on an investment, incorporating the risk associated with that investment. One of the critical components in the CAPM equation is beta, which measures the stock's volatility relative to the market. Beta reflects the degree to which a security's price is expected to fluctuate in response to market changes.

When estimating the cost of equity, incorporating beta is essential because it captures the systematic risk inherent in investing in a particular stock compared to the overall market. This helps investors understand how much additional return they should expect for taking on that risk. A higher beta indicates that the stock is more volatile than the market, resulting in a higher cost of equity to compensate investors for that increased risk.

On the other hand, aspects like expected future earnings, current market share, and net profit margin, while relevant to evaluating a company's performance and prospects, do not directly factor into the CAPM calculation. CAPM specifically relies on the relationship between risk (as measured by beta) and expected return, emphasizing the importance of understanding how the stock behaves in relation to broader market movements.