CAPM (Capital Asset Pricing Model) Calculator
Calculate the expected return on an investment using the Capital Asset Pricing Model, based on the risk-free rate, asset beta, and expected market return.
How to use this tool
- Enter risk-free rate, beta (β) and expected market return in the fields above.
- Results update instantly as you type — or click Calculate.
- Read your expected return e(r) and the full breakdown beneath it.
⚠ This tool provides general estimates for education only and is not financial, tax or legal advice. Figures may not reflect your situation — verify with a qualified professional.
Formula
E(Ri) = Rf + βi × (E(Rm) − Rf)
Where: Rf = risk-free rate, βi = asset beta, E(Rm) = expected market return, (E(Rm) − Rf) = market risk premium.
How it works
The Capital Asset Pricing Model (CAPM), developed by William Sharpe, John Lintner, and Jan Mossin in the 1960s, describes the linear relationship between systematic risk (beta) and expected return for assets in a well-diversified portfolio. Beta measures an asset's sensitivity to market movements: a beta of 1 moves with the market, above 1 is more volatile, below 1 is less volatile.
CAPM assumes markets are efficient, investors hold diversified portfolios, and all unsystematic risk can be diversified away. Real-world expected returns may deviate from CAPM predictions due to factors not captured by a single beta, such as size, value, and momentum.
Worked example
Stock with β = 1.5, Rf = 3%, E(Rm) = 10%
- Risk-free rate Rf = 3%
- Expected market return E(Rm) = 10%
- Market risk premium = 10% − 3% = 7%
- Asset risk premium = β × MRP = 1.5 × 7% = 10.5%
- Expected return = 3% + 10.5% = 13.5%
The CAPM expected return is 13.5% for a stock with β = 1.5.
Common mistakes to avoid
- Using a short-term Treasury rate as the risk-free rate rather than a long-term government bond yield, which mismatches the time horizon of most equity investments.
- Plugging in a historical beta without recognizing it may not predict future sensitivity — beta reverts toward 1 over time for most stocks.
- Treating CAPM output as the definitive expected return rather than one input into a range of valuation estimates; CAPM has well-documented empirical limitations.
Key terms
- Beta (β)
- A measure of a stock's systematic risk relative to the market; β = 1 means the stock moves in line with the market.
- Risk-free rate (Rf)
- The return on a theoretically riskless investment, commonly proxied by short-term government treasury yields.
- Market risk premium
- The excess return of the market portfolio over the risk-free rate; compensation for bearing market risk.
- Systematic risk
- Market-wide risk that cannot be eliminated through diversification; the only risk compensated in CAPM.
- Security Market Line (SML)
- A graphical representation of CAPM showing expected return as a linear function of beta.
Frequently asked questions
- What risk-free rate should I use in CAPM?
- Most practitioners use the yield on the 10-year US Treasury note when valuing equity investments. Match the horizon of the risk-free rate to the investment period.
- What is the equity risk premium (ERP) used in CAPM?
- The ERP is the expected market return minus the risk-free rate — the extra return investors demand for bearing market risk. US ERP estimates typically range from 4% to 7% depending on the methodology and data period.
- What are the limitations of CAPM?
- CAPM assumes a single factor (market risk), normal return distributions, and frictionless markets. Empirically, size, value, and momentum factors also explain returns. Multi-factor models like Fama-French can improve on CAPM.