Capital Asset Pricing Model (CAPM) Calculator
Calculate the expected return on investment using the CAPM formula. Perfect for finance professionals and investors.
CAPM Inputs
How to Use This Calculator
Enter the risk-free rate, the asset's beta, and the expected market return to compute the CAPM expected return. The calculator re-evaluates the output right after you click Calculate or change any input.
Methodology
The tool uses the Capital Asset Pricing Model, which quantifies the relationship between expected return and systemic risk. CAPM assumes a linear trade-off between risk and reward based on the security's beta relative to the market.
Once you provide the inputs, the formula calculates the premium you demand over the risk-free rate, multiplies it by beta, and adds the result back to the risk-free rate to arrive at the expected return.
Glossary
- Risk-Free Rate: Return of a zero-risk instrument, typically a short-term government bond.
- Beta: How volatile the investment is relative to the broader market.
- Market Return: The expected return of a diversified market portfolio.
Example
For a beta of 1.3, a risk-free rate of 2%, and a market return of 8%, the expected return is computed as:
Expected Return = 2 + 1.3 × (8 − 2) = 9.8%
Frequently Asked Questions
What is CAPM? CAPM describes the relationship between a security's risk and its expected return relative to the market.
Why is Beta important? Beta captures how much the security moves versus the market and scales the risk premium accordingly.
What is the risk-free rate? It is the theoretical return of an investment with no risk of financial loss, often a government bond.
How does market return affect CAPM? A higher market return increases the risk premium, boosting the expected return for the same beta.
Can CAPM predict future returns? It provides an estimate based on historical behavior and assumptions; it does not guarantee future performance.