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CAPM Calculator

Find an asset's expected return from its beta.

Result

10.00%
5.00%

How it is calculated

The Capital Asset Pricing Model gives the return an investor should require for a stock: E(R) = Rf + β × (Rm - Rf). Rf is the risk-free rate in percent, such as a government bond yield. Rm is the expected market return in percent. β (beta) is the stock's sensitivity to the market: 1 moves with the market, above 1 amplifies it, below 1 dampens it. Rm - Rf is the market risk premium, also shown. Results are percentages with two decimals. No input is restricted, so a negative beta or a premium below zero is calculated as entered. The model rests on assumptions and past betas, so treat it as a benchmark, not a forecast.

Worked example

Risk-free rate 4%, market return 9%, beta 1.2. Market risk premium = 9 - 4 = 5.00%. Beta-adjusted premium = 1.2 × 5 = 6. Expected return = 4 + 6 = 10.00%. A stock with beta 1.2 should therefore offer 10.00% to compensate for being more volatile than the market. With beta 1.0 the answer would be 9%, the market return.

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Common mistakes

  • Entering the market premium (5) in the market return field. Rm is the total market return (9), not the excess over Rf.
  • Entering rates as decimals (0.04) instead of percents (4).
  • Using a beta calculated against a different index than the one the market return refers to.
  • Using a long-term bond yield for Rf but a short-term market return, which mixes time horizons.

About this calculator

This calculator finds an asset's expected return using the Capital Asset Pricing Model (CAPM): Ra = Rf + β×(Rm − Rf), where Rf is the risk-free rate, β (beta) measures the asset's volatility relative to the market, and Rm is the expected market return, so Rm − Rf is the market risk premium.

Corporate finance analysts use CAPM to estimate the cost of equity for a discount rate in valuation models, and investors use it to judge whether a stock's expected return compensates fairly for its systematic (market) risk. Enter the risk-free rate, the asset's beta, and the expected market return to get the expected return.

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