CAPM Calculator (Capital Asset Pricing Model)

Estimate the required return on a stock or portfolio using the Capital Asset Pricing Model. Adjust risk-free rate, market return, and beta, and compare scenarios side by side.

CAPM Calculator

%

Typically a long-term government bond yield (e.g., 10-year Treasury).

%

Long-run equity market return assumption (e.g., 7–10% per year).

Sensitivity of the asset to market movements. β > 1 = more volatile than market.

Required return (CAPM)

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Market risk premium

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E[Rm] − Rf. This is the extra return investors demand for holding the market instead of risk-free assets.

%

Compare your forecast/analyst estimate with the CAPM required return.

Scenario comparison

Save multiple CAPM scenarios (different betas, risk-free rates, or market returns) and compare required returns side by side.

# Label Rf (%) E[Rm] (%) β CAPM return (%) Actions
No scenarios yet. Calculate and click “Add scenario to comparison”.

CAPM formula and explanation

\( E(R_i) = R_f + \beta_i \times (E(R_m) - R_f) \)

  • E(Ri): required (or expected) return on asset i
  • Rf: risk-free rate
  • E(Rm): expected market return
  • βi: beta of asset i (systematic risk)
  • E(Rm) − Rf: market risk premium

CAPM links the required return on an asset to its exposure to market risk. Investors should demand at least this return to be compensated for:

  • the time value of money (risk-free rate), and
  • systematic risk (beta times the market risk premium).

Step-by-step example

Suppose:

  • Risk-free rate Rf = 4%
  • Expected market return E(Rm) = 9%
  • Stock beta β = 1.2

Then:

  1. Market risk premium = 9% − 4% = 5%
  2. Risk premium for the stock = 1.2 × 5% = 6%
  3. Required return = 4% + 6% = 10%

If you expect the stock to return 13%, that is 3 percentage points above the CAPM required return, suggesting potential undervaluation (assuming CAPM assumptions hold).

How to choose inputs

  • Risk-free rate: often the yield on a long-term government bond in the same currency as your cash flows.
  • Market return: use a long-run historical equity market return or your forward-looking estimate.
  • Beta: can be estimated via regression against a market index or taken from data providers. Adjust for leverage if needed.

Limitations of CAPM

CAPM is widely used in corporate finance and valuation, but it relies on simplifying assumptions:

  • Investors hold diversified portfolios, so only systematic risk matters.
  • Markets are frictionless and efficient.
  • Risk is fully captured by beta.

Empirical research shows that other factors (size, value, momentum, quality, etc.) also explain returns. In practice, analysts often use CAPM as a baseline and complement it with multi-factor models and qualitative judgment.

Frequently asked questions

What is a “good” beta value?

There is no universally good beta. A higher beta means higher volatility and higher required return. Defensive stocks (utilities, consumer staples) often have β < 1, while cyclical or growth stocks often have β > 1.

Can CAPM be used for private companies?

Yes, but you must estimate beta indirectly, for example by using comparable public companies, unlevering and relevering their betas to match the private firm’s capital structure.

How is CAPM used in valuation?

The CAPM required return is often used as the cost of equity in discounted cash flow (DCF) models and in computing the weighted average cost of capital (WACC).