CAPM Calculator

Typically the yield on government bonds.
How volatile the asset is vs the market (1 = market average).
Finance

Use the Capital Asset Pricing Model (CAPM) to find the expected return on an investment for the risk you take. Enter the risk-free rate, the asset's beta, and the expected market return, and this calculator gives the required return and the market risk premium.

Formula

Expected Return = Risk-Free Rate + Beta × (Market Return − Risk-Free Rate)
  • CAPM estimates the return investors should demand for holding a risky asset.
  • The market risk premium is the expected market return minus the risk-free rate.
  • Beta scales that premium: a beta above 1 means more risk and a higher required return; below 1 means less.
  • A beta of 1 returns the market's expected return; a beta of 0 returns just the risk-free rate.
  • CAPM is widely used to estimate the cost of equity for valuation and discount rates.
  • Enter rates as plain percentages (e.g. 5 for 5%).

Beta 1.2, risk-free 5%, market 12%

Inputs
  • Risk-Free Rate (%): 5
  • Beta: 1.2
  • Expected Market Return (%): 12

Market premium = 12% − 5% = 7%. Expected return = 5% + 1.2 × 7% = 5% + 8.4% = 13.4%.

Frequently asked questions

What is CAPM used for?
It estimates the expected (or required) return on an asset given its risk. Investors and analysts use it to price risk and to estimate the cost of equity in valuations.
What does beta mean?
Beta measures how much an asset moves relative to the overall market. A beta of 1.2 means it tends to move 20% more than the market, so investors demand a higher return for it.
What is the risk-free rate?
It's the return on an investment with essentially no risk, usually proxied by the yield on short- or long-term government bonds.
What is the market risk premium?
It's the extra return investors expect from the market over the risk-free rate (market return − risk-free rate). CAPM multiplies it by beta to size the risk premium for a specific asset.