Capital Asset Pricing Model (CAPM) Calculator
This CAPM calculator helps investors determine the expected return on an investment, considering its risk compared to the market. It's ideal for finance professionals and investors aiming to evaluate the potential profitability of securities.
CAPM Calculator
Results
Data Source and Methodology
All calculations are based on the Capital Asset Pricing Model (CAPM) formula, a fundamental concept in modern finance theory.
The Formula Explained
Expected Return = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate)
Glossary of Variables
- Risk-Free Rate: The return of an investment with zero risk, typically associated with government bonds.
- Beta: A measure of a stock's volatility in relation to the market.
- Market Return: The expected return of the market as a whole.
How It Works: A Step-by-Step Example
For a stock with a beta of 1.3, a risk-free rate of 2%, and a market return of 8%, the expected return is calculated as follows:
Expected Return = 2 + 1.3 × (8 - 2) = 9.8%
Frequently Asked Questions (FAQ)
What is CAPM?
The Capital Asset Pricing Model (CAPM) is a model that describes the relationship between expected return and risk of investing in a security.
Why is Beta important?
Beta measures a stock's volatility relative to the market, indicating its risk level compared to the market average.
What is the risk-free rate?
The risk-free rate is the theoretical return of an investment with no risk of financial loss.
How does market return affect CAPM?
The market return influences the premium expected from risky investments compared to risk-free investments.
Can CAPM predict future returns?
CAPM estimates expected returns based on historical data and assumptions, not guaranteed future returns.