CAPM Calculator Guide
Use this CAPM calculator to estimate expected return with the Capital Asset Pricing Model using risk-free rate, market return, beta, and market risk premium.
How to use the CAPM calculator
Enter the risk-free rate, expected market return, and beta for the asset. The calculator estimates the required return, market risk premium, beta risk premium, systematic risk, and related CAPM scenarios.
You can also enter optional price and dividend assumptions to compare a CAPM required return with a simple one-year valuation view.
CAPM formula
The CAPM formula is: Expected Return = Risk-Free Rate + Beta x (Market Return - Risk-Free Rate). The difference between market return and risk-free rate is the market risk premium.
Beta measures how sensitive the asset is to broad market movement. A beta above 1.0 usually means the asset is more volatile than the market, while a beta below 1.0 usually means lower market sensitivity.
How to interpret CAPM expected return
The CAPM result is commonly used as a required return, cost of equity estimate, or hurdle rate for an investment with similar systematic risk.
If your forecast return is below the CAPM required return, the asset may not compensate enough for its market risk. If the forecast return is higher, the investment may deserve deeper analysis.
Risk-free rate, beta, and market return
The risk-free rate should match the investment horizon and currency. Analysts often use government bond yields as a proxy, but the correct rate depends on the analysis.
Beta should be based on a relevant benchmark and time period. Market return should represent a realistic expected return, not only the most recent year of performance.
Common CAPM mistakes
The most common mistake is treating CAPM as a precise forecast. CAPM is a model, and its output depends heavily on assumptions for beta, risk-free rate, and market return.
CAPM only prices systematic market risk. It does not fully capture company-specific risk, liquidity risk, execution risk, or unusual business events.
- Use a risk-free rate that matches the investment horizon.
- Avoid relying on stale or unstable beta estimates.
- Compare CAPM with other valuation methods.
- Adjust the analysis when the asset has unusual risk characteristics.