CAPM Calculator
Enter the risk-free rate, an asset's beta and the expected market return to get the return the Capital Asset Pricing Model says that risk should earn.
| IF BETA WERE | REQUIRED RETURN |
How it's calculated
The Capital Asset Pricing Model says an investment should return the risk-free rate plus extra compensation for the market risk it carries. The formula is E(R) = Rf + β × (Rm − Rf), where Rf is the risk-free rate, β is the asset's beta and Rm is the expected return of the market.
The term Rm − Rf is the market risk premium, the extra return investors expect for holding the whole market instead of a risk-free asset. Beta scales that premium. A beta of 1 moves with the market and earns the full premium, a beta below 1 earns less of it, and a beta above 1 earns more. You can type the premium directly if you already have it, instead of the market return.
If you add your own forecast return, the calculator reports alpha, which is your forecast minus the CAPM figure. A positive alpha means the forecast beats the return the model says the risk requires. The same CAPM result is also widely used as the cost of equity when valuing a company.
Worked example
Take a risk-free rate of 4%, an expected market return of 9% and a beta of 1.2. The market risk premium is 9 − 4 = 5%. The asset's risk premium is 1.2 × 5 = 6%, so the expected return is 4 + 6 = 10%. If you forecast 12% for the stock, alpha is +2%.
A defensive stock with a beta of 0.8 under the same market gives 4 + 0.8 × 5 = 8%, which is why the table lists the required return across several betas. Once you have the expected return, you can use it as a discount rate in a present value calculation, or compare it with a dividend-paying holding in the Dividend Calculator.
Frequently asked
What is the CAPM formula?
Expected return equals the risk-free rate plus beta times the market risk premium: E(R) = Rf + β × (Rm − Rf). The market risk premium is the expected market return minus the risk-free rate.
What risk-free rate should I use?
Use the yield on a government bond in the same currency as your investment and with a maturity close to your holding period. Ten-year government bond yields are a common choice for long-term valuation.
What does beta mean?
Beta measures how strongly an asset's returns have moved with the overall market. A beta of 1 means it moves with the market, above 1 means it has swung more than the market, and below 1 means less. A negative beta means it has tended to move the opposite way.
What does a positive alpha mean?
Alpha here is your forecast return minus the CAPM expected return. A positive value means you expect more than the model says the risk requires. It is only as reliable as your forecast, and the model's inputs are estimates.
What are the limits of CAPM?
It assumes beta captures all relevant risk, that one market return represents the whole market, and that past beta describes the future. Real betas and risk premiums change, so treat the result as a benchmark rather than a precise number.