CAPM Calculator
Estimate a CAPM-implied cost of equity from stated assumptions.
For educational purposes only. This calculator does not provide investment advice.
📊 Visual Analysis
What This Calculator Does
The CAPM Calculator estimates a CAPM-implied cost of equity from a risk-free-rate assumption, an expected market-return assumption, and beta. The output is a model input that may be used in valuation or capital-budgeting analysis; it does not determine whether an investment is fairly priced and does not forecast realized return.
Formula
Where:
- E(R) = CAPM-implied cost-of-equity estimate
- Rf = Low-credit-risk reference-rate assumption matched to currency, horizon, and nominal/real basis
- β = Estimated sensitivity of the asset's returns to the selected market benchmark
- Rm = Expected return assumption for the selected market benchmark
The formula adds a beta-scaled market risk premium to the selected reference rate. The output is assumption-dependent and is commonly used as a cost-of-equity input; it is not a forecast or guarantee of realized return.
Input Fields Explained
Risk-Free Rate (%)
A low-credit-risk reference-rate assumption matched to the modeled cash flows' currency, horizon, and nominal or real basis. Government yields are often used as practical proxies, but no instrument is universally risk-free. Record the source and observation date.
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 indicates market sensitivity similar to the selected benchmark over the estimation period. Beta above or below 1 indicates higher or lower historical sensitivity to that benchmark, not total risk and not a promise of higher or lower future return. Negative beta estimates can be unstable and depend on the data window and methodology.
Example Calculation
Assume a stock has beta = 1.2, a 4.5% risk-free-rate input, and a 9% expected market-return input. These are illustrative assumptions, not current market data.
Risk Premium = 9% − 4.5% = 4.5%
E(R) = 4.5% + 1.2 × 4.5%
E(R) = 4.5% + 5.4% = 9.9%
Under these assumptions, CAPM produces a 9.9% cost-of-equity estimate. The difference from the 9% market-return assumption reflects the selected beta and market risk premium. Comparing another return estimate with 9.9% does not by itself establish that the stock is undervalued or overvalued; valuation also depends on cash flows, price, horizon, and model assumptions.
How to Read the Result
With a positive market risk premium, this generally reflects a beta above 1 relative to the selected benchmark. It does not establish higher total risk or predict a higher realized return.
This generally occurs when beta equals 1 under the selected assumptions. It does not imply that the asset has the same total risk as a diversified market portfolio.
With a positive market risk premium, this generally reflects a beta below 1 relative to the selected benchmark. It is not a guarantee of defensive behavior or lower realized loss.
This can occur when the selected market-return assumption is below the selected risk-free-rate input or when beta is negative. It signals that the chosen assumptions deserve review; it is not, by itself, an instruction to avoid risky assets.
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
- Estimating a cost-of-equity input for valuation or capital-budgeting scenarios
- Testing how beta and market-risk-premium assumptions affect a model output
- Comparing consistently estimated cost-of-equity scenarios across similar analyses
- Providing an equity discount-rate input when the modeled cash flows are equity cash flows with matching currency, horizon, and risk assumptions
- Documenting one component of a broader valuation framework rather than deciding fair value by itself
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
Continue this workflow
Keep going on the Risk & Portfolio path: open the topic hub, read the step-by-step guide, compare related calculators, and review example metrics.
Frequently Asked Questions
What does CAPM tell me about expected return?
CAPM produces an implied cost-of-equity estimate from a risk-free-rate assumption, beta, and an expected market risk premium. The output changes with the selected benchmark, beta estimation window, and forward-looking assumptions. It does not forecast realized return, determine fair value, or recommend an investment.
What risk-free rate should I use?
Use a low-credit-risk reference rate that is consistent with the cash flows' currency, horizon, and nominal or real basis. A government yield may be used as a practical proxy when those conditions are appropriate, but no instrument is universally risk-free. Check a current authoritative source and document the observation date.
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.