CAPM Calculator
Calculate the expected return for a security using the Capital Asset Pricing Model. This is useful for valuation work, cost of equity estimates, and comparing investment opportunities.
Often based on Treasury yields with a similar investment horizon.
Expected total return for the market portfolio.
Measures how sensitive the investment is to market movements.
Rf = risk-free rate, Rm = expected market return, and (Rm - Rf) = market risk premium.
Market risk premium = 10.50% - 4.25% = 6.25%
Expected return = 4.25% + 1.20 x 6.25% = 11.75%
What does CAPM calculate?
CAPM estimates the return investors should require for taking on a given level of market risk. It combines the risk-free rate, the expected market return, and the investment beta to produce an expected or required return.
What is beta in the CAPM formula?
Beta measures how strongly an investment tends to move relative to the market. A beta of 1.00 implies market-like volatility, above 1.00 suggests higher sensitivity, and below 1.00 suggests lower sensitivity. Negative beta means the asset may move opposite the market.
What should I use for the risk-free rate?
Analysts commonly use a government bond yield that matches the horizon of the decision they are making. For U.S.-based work, Treasury yields are often used because they are treated as close to risk-free in valuation models.
How is CAPM used in practice?
CAPM is often used to estimate cost of equity, compare expected returns across investments, and support valuation models like WACC, discounted cash flow analysis, and hurdle-rate decisions.
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📐 Formula
Rf = risk-free rate, Rm = expected market return, and (Rm - Rf) = market risk premium.
📝 Example Calculation
Market risk premium = 10.50% - 4.25% = 6.25%
Expected return = 4.25% + 1.20 x 6.25% = 11.75%