When comparing the CAPM and Gordon's constant growth model to calculate the cost of equity,we find:

Question

Quizplus · Accepted Answer

CA) The Capital Asset Pricing Model (CAPM) indeed directly considers risk through the beta coefficient, which measures a stock's volatility relative to the market. Gordon's constant growth model (also known as the Dividend Discount Model for a perpetuity) uses the market price of shares and expected dividends to reflect the risk preference of investors, as these elements are influenced by the market's perception of risk.C) Similarly, while CAPM uses beta to directly account for risk, Gordon's model incorporates risk indirectly through dividend expectations. Investors' required rate of return, which influences the cost of equity calculated by the model, is affected by their risk assessment, which is reflected in their dividend expectations.

When Comparing the CAPM and Gordon's Constant Growth Model to Calculate