CAPM Calculator

CAPM Calculator

Calculate an asset's expected rate of return and cost of equity capital based on systemic market risk and the Capital Asset Pricing Model.

Model Inputs

%
Enter risk-free rate (e.g. 10-Yr US Treasury yield, 0% - 25%).
Enter asset beta (-3.0 to 5.0). Market beta = 1.0.
%
Enter expected market return (typically 7% - 12%).

CAPM Analysis

Expected Return E(Ri)
11.44%
Aggressive / High Volatility (β = 1.25)
Market Risk Premium
5.75%
Asset Risk Premium
7.19%
Risk-Free Baseline
4.25%
Beta Sensitivity (Security Market Line)
Risk Profile Beta (β) Asset Premium Expected Return

The Capital Asset Pricing Model (CAPM) Explained

The Capital Asset Pricing Model (CAPM) is a foundational cornerstone of modern financial economics. Developed by William Sharpe and John Lintner, CAPM defines the mathematical relationship between systemic non-diversifiable risk and the expected return demanded by rational investors.

Mathematical Formulation

E(R_i) = R_f + β_i × [ E(R_m) - R_f ] Where: • E(R_i) = Expected Return of the investment asset • R_f = Risk-Free Rate of return (typically 10-Year US Treasury yield) • β_i = Beta coefficient (sensitivity of the asset relative to the benchmark market) • E(R_m) = Expected benchmark market return (e.g., S&P 500) • [E(R_m) - R_f] = Equity Market Risk Premium (ERP)

Realistic Illustrative Example

Suppose you analyze a high-growth tech stock with a Beta of 1.25. If the Risk-Free Rate is 4.25% and the Expected Market Return is 10.00%:

  • Market Risk Premium: 10.00% − 4.25% = 5.75%.
  • Asset Risk Premium: 1.25 × 5.75% = 7.19%.
  • CAPM Expected Return: 4.25% + 7.19% = 11.44%.
  • Takeaway: Because the stock exhibits 25% higher systemic volatility than the broader market, investors require an 11.44% return to justify the risk.

How to Use This Calculator

  1. Enter the current Risk-Free Rate (benchmark 10-Year US Treasury bond yield).
  2. Enter the asset's Beta (β) (available on Yahoo Finance, Bloomberg, or Google Finance).
  3. Input the projected long-term Market Return (US equity historical benchmark is 9.5% - 10.5%).
  4. Click Calculate Expected Return to inspect the required return, risk premiums, and Security Market Line sensitivity table.

Frequently Asked Questions

What does a Beta above 1.0 versus below 1.0 mean?
A beta of 1.0 indicates the asset moves in tandem with the broad market. A beta > 1.0 (e.g. 1.30) signifies higher volatility—magnifying market gains during bull markets and deepening declines during downturns. A beta < 1.0 (e.g. 0.65 for consumer staples or utility stocks) reflects defensive stability with lower systemic swings.
Can Beta be negative?
Yes, though rare. Assets with negative betas (such as gold or certain short hedging strategies) historically move in the opposite direction of the equity market, acting as an insurance hedge and resulting in an expected return lower than the risk-free rate.