CAPM calculator
The capital asset pricing model (CAPM) gives the return investors should expect from an asset for the market risk it carries. Enter the risk-free rate, the asset's beta and either the expected market return or the market risk premium to get the expected return, which is often used as the cost of equity.
Runs in your browser: nothing you enter is sent anywhere.
How to use it
- Enter the risk-free rate in percent per year, for example 4.
- Enter the beta of the stock or project, for example 1.2.
- Choose whether you know the expected market return or the market risk premium, and enter it.
- Read the expected return; the tool also shows the premium for the asset and the market figures.
E(R) = Rf + β × (E(Rm) − Rf)
- Rf — risk-free rate;
- β — beta of the asset;
- E(Rm) − Rf — market risk premium; if you enter a market return, the tool subtracts Rf for you.
Worked example
Risk-free rate 4%, beta 1.2, expected market return 10%.
- Market risk premium: 10 − 4 = 6 %.
- Premium for this stock: 1.2 × 6 = 7.2 %.
- Expected return: 4 + 7.2 = 11.2 %.
With a beta of 0.8 and a premium of 5.5% over a 3% rate, the answer is 3 + 0.8 × 5.5 = 7.4%.
Common mistakes
- Entering the market return in the premium box (or the other way round): a 10% market return is a 6% premium when the risk-free rate is 4%.
- Mixing currencies: the rate, beta and premium should all refer to the same market and currency.
- Using a beta from a very short or unusual period without checking it against other sources.
- Treating the result as precise: small changes in the premium change the answer noticeably, so try a range.
Frequently asked questions
What is the CAPM formula?
E(R) = Rf + β × (E(Rm) − Rf): the risk-free rate plus beta times the market risk premium, which is the expected market return minus the risk-free rate.
Which risk-free rate should I use?
Usually the yield on a government bond in the currency of the cash flows, with a maturity that matches your horizon; long-term bonds are common for valuing companies. Use the rate in percent per year.
Where do I get beta?
Beta measures how much an asset's returns move with the market. Financial data sites publish betas, or you can estimate one by regressing the asset's returns on an index's returns. Different sources and periods give different betas.
What does a beta below 1 or below 0 mean?
A beta of 1 moves with the market; below 1 moves less, so CAPM asks for less than the market return; above 1 moves more. A negative beta tends to move against the market, and CAPM then gives an expected return below the risk-free rate.
Is the CAPM result a forecast?
No. It is a required or expected return under the model's assumptions. Real returns differ, and the result depends heavily on the premium and beta you assume.