CAPM Calculator
The expected return on an investment by the capital asset pricing model, from a risk-free rate, the investment’s beta and the market return or risk premium you choose.
Result
Expected return: 14.8692%Estimate
An expected return under the model, on the three figures you choose. It is not a forecast of what the investment will earn.
- Market risk premium
- 8.28%
- This investment’s risk premium
- 11.5092%
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Results are arithmetic estimates based on the assumptions you enter, not accounting, tax, investment or lending advice. Forecasts can be wrong and important decisions should be checked with a qualified adviser. Read the full disclaimer
How to use the CAPM Calculator
- Enter the risk-free rate you want to use, such as a government bond yield for your time horizon.
- Enter the investment's beta.
- Enter either the market return you expect or the market risk premium, and read the expected return.
The formula
expected return = risk-free rate + beta × (market return − risk-free rate)The bracket is the market risk premium: what the market as a whole is expected to pay above the risk-free rate. Beta scales it for this investment.
Only market risk counts
The model pays a premium only for risk that moves with the market, because risk specific to one company can be spread away by holding many. So two stocks with the same beta have the same expected return under CAPM, however different their businesses look.
What the diagram shows
The expected return as one bar: the risk-free rate, and the risk premium this beta adds on top.
With your numbers
- Expected return = 3.36% + 1.39 × 8.28% = 14.8692%
Quick reference
An expected return under the model, on the three figures you choose. It is not a forecast of what the investment will earn.
| Example | Expected return |
|---|---|
| 3.36%, beta 1.39, market 11.64% | 14.8692% |
| Beta 1: the market return | 9% |
| Beta 0: the risk-free rate | 4% |
| Beta 0.8 with a 5% premium | 8% |
| Beta 1.5 with a 6% premium | 13% |
| Negative beta, −0.5 | 1.5% |
Common questions about the CAPM Calculator
- What does beta mean?
- How strongly an investment has moved with the market. A beta of 1 has moved with it; 2 has moved twice as far, up and down; 0.5 half as far. A beta near 0 has not tracked the market at all. Beta is measured from past prices, so it can change.
- Which risk-free rate and market return should I use?
- The page supplies neither. People commonly use the yield on government debt that matures around their investment horizon, and a long-run estimate of the market return or premium, but the estimates differ widely between sources and over time. The answer moves one for one with the premium times beta, so try more than one.
- What does a negative beta do?
- It gives an expected return below the risk-free rate. The model says an investment that tends to rise when the market falls acts as insurance, and investors accept a lower return for it.
- How is CAPM used in practice?
- Most often to estimate the cost of equity: the return shareholders require, which then goes into the weighted average cost of capital or a dividend discount model. It is a model of what investors should require for market risk, not a forecast of what a stock will return.