# Stock Returns: How Much Should You Actually Expect?

Ever wondered what return you should demand from a stock to make it worth the risk? That's where cost of equity comes in—basically the minimum profit rate that justifies buying a company's shares.

There are two main ways to calculate it:

**CAPM (Capital Asset Pricing Model)** - The popular kid:
- Risk-Free Rate + Beta × (Market Return - Risk-Free Rate)
- Example: 2% + 1.5 × (8% - 2%) = 11%
- Translation: If a stock is 1.5x more volatile than the market, you'd want 11% returns to compensate for that extra risk

**DDM (Dividend Discount Model)** - For dividend lovers:
- (Annual Dividend / Stock Price) + Dividend Growth Rate
- Example: ($2 / $50) + 4% = 8%
- Translation: Stable dividend companies = lower expected returns needed

**Why this matters:**
- For you: If a stock's actual returns beat its cost of equity, it might be worth buying
- For companies: It's their benchmark—if new projects can't beat this rate, they shouldn't invest
- For portfolios: Cost of equity helps calculate overall capital costs (WACC), which affects everything from valuations to growth plans

**Quick reality check:** Cost of equity is always higher than cost of debt (why? stocks are riskier—no guaranteed paycheck like bonds). Companies with high costs of equity struggle to raise cash; low costs signal investor confidence.

Bottom line—cost of equity is your financial litmus test. It tells you if you're getting paid enough for the risk you're taking.