📊 CAPM Calculator
Calculate the expected return on an asset using the Capital Asset Pricing Model.
Typically the yield on a 10-year Treasury bond.
Measure of the asset's volatility compared to the market.
Historical average return of the broad market (e.g., S&P 500).
The Comprehensive Guide to Capital Asset Pricing Model (CAPM) Calculator
What is a Capital Asset Pricing Model (CAPM) Calculator?
Our CAPM Calculator uses the Nobel-prize-winning Capital Asset Pricing Model to mathematically determine exactly what return an investor should demand when buying a specific stock, given the amount of risk they are taking on.
The core philosophy of CAPM is simple: Investors must be compensated for taking risks and dealing with the time value of money. If a completely safe, risk-free asset (like US Government Treasury Bonds) pays a guaranteed 4% return, an investor would only buy a risky technology stock if they mathematically expect to earn more than 4%. CAPM calculates exactly what that target return needs to be by evaluating the stock's volatility (Beta) against the overall stock market.
The Mathematical Formula
Where Er = Expected Return, Rf = Risk-Free Rate, β = Beta, Rm = Expected Market Return
Calculation Example
Let's evaluate a high-growth technology stock that is historically very volatile compared to the broader market.
- Variables: Risk-Free Rate = 4%, Beta = 1.5, Market Return = 10%.
- Risk Premium: 10% − 4% = 6%
- Expected Return: 4% + (1.5 × 6%) = 4% + 9% = 13%
- Result: You should demand an Expected Return of 13% before buying this stock.
Strategic Use Cases
- DCF Models: Investment bankers use CAPM to calculate a company's Cost of Equity.
- Portfolio Construction: Finding stocks with low Beta to reduce portfolio risk during recessions.
- Setting Hurdle Rates: Private equity firms use CAPM to set minimum return thresholds before investing.
Frequently Asked Questions
What exactly is Beta?
Beta measures how wildly a stock historically swings up and down compared to the overall market (S&P 500). The market has a Beta of exactly 1.0. If a stock has a Beta of 1.2, it is 20% more volatile than the market.
What should I use for the Risk-Free Rate?
In the United States, financial analysts almost universally use the current yield on the 10-Year U.S. Treasury Bond as the baseline Risk-Free Rate.
What are the flaws of CAPM?
CAPM relies entirely on historical data to predict the future. A stock's Beta over the last 5 years might not reflect future volatility. CAPM also assumes perfectly rational investors, which is rarely true in practice.
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