CAPM as a hurdle rate for capex

The Foundation of Modern Portfolio Theory
The Capital Asset Pricing Model (CAPM) remains one of the most fundamental concepts in finance, helping investors understand the relationship between risk and expected return.
The CAPM Formula:
Expected Return = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate)
Or mathematically: E(R) = Rf + β(Rm - Rf)
Where:
E(R) = Expected return on the asset
Rf = Risk-free rate (typically 10-year Treasury bonds)
β = Beta (measure of systematic risk)
Rm = Expected market return
(Rm - Rf) = Market risk premium

Real-World Example:
Let's calculate the expected return for a tech stock:
Risk-free rate (Rf) = 4%
Market return (Rm) = 10%
Stock's Beta (β) = 1.5
Calculation: E(R) = 4% + 1.5 × (10% - 4%) E(R) = 4% + 1.5 × 6% E(R) = 4% + 9% = 13%

This means investors should expect a 13% return to compensate for the higher risk (Beta > 1).

Having seen this how would you put it into a hospitality model ? 1) calculate the minimum return you should achieve in a new capex investment taking risk into account. The hotel and restaurant business was is certainly risky so beta should be taken accordingly, This could answer the question should we renovate or not as there is a risk associated with the unknown / unfamiliar Although most people back themselves a good way to analyse investments is use the CAPM as your perceived hurdle rate or min IRR!

Always use a variety of tools to analyse qualify planned investments / capital influxes
IRR | NPV | PV | Money Multiple | Payback Period |

Do calculate WACC and CAPM it helps qualify the hurdle rate or your expected returns based on the source and gearing of funds.

Key Takeaways:
✅ Higher beta = Higher expected return (and risk)
✅ Beta of 1.0 = Moves with the market
✅ Beta > 1.0 = More volatile than market
✅ Beta < 1.0 = Less volatile than market

While CAPM has limitations and assumptions, it provides a solid framework for making investment decisions and understanding risk-return relationships.
What's your experience with CAPM in practice? Share your thoughts below! 💭