Capital asset pricing model

The model that prices risk as a single number: expected return equals the risk-free rate plus beta times the equity risk premium.

For a defensive business with a beta of 0.85, at a 7% risk-free rate and a 5.5% premium, the required return is 11.68%.

Its logic is that investors hold diversified portfolios, so the only risk that should be compensated is the part that cannot be diversified away, which is measured by covariance with the market. Company-specific risk is not priced because a portfolio can eliminate it.

The empirical record is mixed and the criticisms are well known: beta is unstable, low-beta stocks have historically returned more than the model predicts, and the risk-free rate is not risk-free for a rupee investor with an offshore benchmark. It survives because it forces an explicit statement of required return.

Use it as a starting point and adjust with judgement, saying that you did.