CAPM Calculator
Calculate expected return using the Capital Asset Pricing Model.
For educational purposes only. This calculator does not provide investment advice.
📊 Visual Analysis
What This Calculator Does
The CAPM Calculator estimates the expected return on an investment using the Capital Asset Pricing Model. By entering the risk-free rate, expected market return, and the asset's beta, you can determine whether an investment is fairly priced based on its risk level.
Formula
Where:
- E(R) = Expected Return on the investment
- Rf = Risk-Free Rate (return on a risk-free asset like government bonds)
- β = Beta (measure of the asset's volatility relative to the market)
- Rm = Expected Market Return (average return of the overall market)
The formula states that an investment's expected return equals the risk-free rate plus a risk premium proportional to the asset's beta. The risk premium is the excess return investors demand for taking on additional market risk.
Input Fields Explained
Risk-Free Rate (%)
The return on a theoretically risk-free investment, usually government bonds. Use yields that match your investment horizon: 3-month Treasury bills for short-term, 10-year Treasury bonds for long-term analysis. This represents the minimum return you'd accept for taking any risk.
Expected Market Return (%)
The average return you expect from the overall market, measured by a broad market index. This is your own assumption — there is no universally correct value. Enter the return you believe the market will deliver over your analysis period.
Beta (β)
A measure of the asset's volatility relative to the market. Beta = 1 means the asset moves with the market. Beta > 1 means higher volatility (more risk, more potential return). Beta < 1 means lower volatility (less risk, less potential return). Negative beta means the asset tends to move opposite to the market.
Example Calculation
You're analyzing a stock with beta = 1.2. The current 10-year Treasury yield is 4.5%, and you expect the market to return 9%.
Risk Premium = 9% − 4.5% = 4.5%
E(R) = 4.5% + 1.2 × 4.5%
E(R) = 4.5% + 5.4% = 9.9%
The stock's expected return is 9.9%, higher than the market's 9% return because the stock has above-average risk (beta = 1.2). If the stock's actual expected return is below 9.9%, it may be overvalued. If above 9.9%, it may be undervalued.
How to Read the Result
The asset has higher risk (beta > 1) and demands higher expected return. This is typical for aggressive growth stocks, technology sectors, or small-cap companies.
The asset has average market risk (beta = 1). This is typical for broad market index funds or large, diversified companies.
The asset has lower risk (beta < 1) and demands lower expected return. This is typical for defensive stocks, utilities, or stable companies with consistent dividends.
This occurs when the risk-free rate exceeds the market return (rare, but possible in economic downturns). The model suggests avoiding risky assets in such scenarios.
Common Mistakes
- Using the wrong risk-free rate. Match the risk-free rate to your investment horizon. Don't use short-term Treasury bills for long-term stock analysis, or vice versa.
- Assuming beta is constant. Beta changes over time based on the company's business, leverage, and market conditions. Use recent beta data (usually based on 2-5 years of price history) rather than averages from decades ago.
- Ignoring regional differences. If analyzing international stocks, use the risk-free rate and market return for that specific country, not U.S. rates.
- Misinterpreting expected return as guaranteed. CAPM provides an expected return based on risk, not a guaranteed return. Actual returns can deviate significantly from expectations.
- Using historical returns as future expectations. Just because the market returned 15% last year doesn't mean it will return 15% this year. Use your own reasoned estimate for the market return input.
When This Calculator Is Useful
- Evaluating whether a stock is fairly valued based on its risk level
- Estimating the required rate of return for capital budgeting decisions
- Comparing expected returns across different investments with varying risk levels
- Calculating the cost of equity for a company in valuation models like DCF
- Determining the appropriate discount rate for investment analysis
Limitations
- CAPM assumes investors are rational and markets are efficient, which may not always hold true
- Beta is based on historical price movements and may not predict future volatility accurately
- The model only considers systematic risk (market risk) and ignores unsystematic risk (company-specific risk)
- CAPM is a single-factor model; more advanced models (like Fama-French) include additional factors like size and value
- The model assumes normally distributed returns and a linear relationship between risk and return, which real markets may violate
Frequently Asked Questions
What does CAPM tell me about expected return?
CAPM calculates an expected return based on the relationship between an asset's risk (beta) and the overall market. The output is a model estimate that depends entirely on the inputs you provide — the risk-free rate, market return, and beta. Changing any of these inputs produces a different expected return. The model does not recommend or guarantee any specific return; it simply quantifies the relationship between risk and return as described by the Capital Asset Pricing Model.
What risk-free rate should I use?
Use the yield on government bonds matching your investment horizon. For short-term analysis, use 3-month Treasury bills. For long-term investments, use 10-year Treasury bonds. Rates change over time — check current yields from your central bank or financial data provider.
Where can I find a stock's beta?
Beta is widely available on financial websites like Yahoo Finance, Google Finance, and broker platforms. Look for the "Beta" or "β" value in the stock's statistics or key ratios section. Beta measures the stock's volatility relative to the overall market.
What does beta tell me about an investment?
Beta measures how sensitive an asset's returns are to movements in the overall market. A beta of 1 means the asset tends to move with the market. Beta above 1 indicates higher sensitivity (amplified moves), while beta below 1 means lower sensitivity (dampened moves). Negative beta suggests the asset tends to move opposite to the market. Beta is based on historical data and may not predict future behavior accurately.
What are the main limitations of CAPM?
CAPM is a single-factor model that only considers market risk. It assumes investors are rational, markets are efficient, and returns are normally distributed — assumptions that often do not hold in practice. More advanced models like the Fama-French three-factor model add size and value factors. CAPM is useful as a starting point but should not be the sole tool for investment decisions.
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Educational Disclaimer
This calculator is for educational and informational purposes only. It does not provide investment, financial, tax, or legal advice. The results are based on the inputs and assumptions you provide and may not reflect real market conditions, fees, taxes, or risks. Always do your own research or consult a qualified professional before making financial decisions.