Discount rates based on CAPM

• Capital Asset Pricing Model (CAPM) says Ra = Rf + βa (Rm − Rf )

- Ra is the required return on assets whose risk class is designated by the Beta or Systematic Risk (the Project Rate).

- Rf is the Risk-free Rate.

- βa is the Asset Beta, which reflects the degree that asset returns (ie, returns of a particular project) are expected to vary with returns of the market (ie, a well Diversified Portfolio of assets or projects).

- (Rm-Rf) is the return over the Risk-free Rate (the market risk premium or equity risk premium) that investors would need or expect in order to invest in an asset.

• Both the "old" Partnerships Victoria methodology and the National PPP Guidelines methodology adapt CAPM to derive discount rates that factor in systematic risk when discounting PSC and bid cashflows for evaluation purposes.