The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk and expected return for an investment. Developed in the 1960s by William Sharpe and others, CAPM remains one of the most widely used models in finance for estimating the cost of equity and evaluating investment opportunities. The formula calculates the expected return of an asset by adding the risk-free rate to a risk premium based on the asset's sensitivity to market movements (beta). This calculator lets you solve for any variable in the CAPM equation, including expected return, risk-free rate, beta, market return, and risk premium.
The Capital Asset Pricing Model is built on the idea that investors need compensation for two factors: the time value of money and the risk they take. The risk-free rate compensates for time value, while the risk premium compensates for bearing systematic risk.
The core formula is: R = Rf + β(Rm - Rf)
Where R is the expected return of the asset, Rf is the risk-free rate (typically a government bond yield), β (beta) measures how much the asset's returns move relative to the market, and Rm is the expected return of the broad market. The term (Rm - Rf) is called the market risk premium, and β(Rm - Rf) is the asset's specific risk premium.
A beta of 1.0 means the asset moves in lockstep with the market. Higher betas indicate greater volatility and higher expected returns. Lower betas suggest less volatility. Negative betas (rare) indicate the asset moves opposite to the market, which can be valuable for portfolio diversification.
This calculator offers two calculation modes:
Expected Return & Risk Premium — Works with expected return, risk-free rate, and risk premium. Enter any two values to solve for the third.
Full CAPM — Uses the complete CAPM equation with beta, market return, risk-free rate, and risk premium. Enter any three values to calculate the fourth.
All rate fields support percent, permille, and basis point units. Select your preferred unit from the dropdown next to each field.
Stock Valuation: Compare a stock's expected return from CAPM against its historical return to identify potentially undervalued or overvalued securities.
Cost of Equity: Companies use CAPM to determine their cost of equity capital, a key input for weighted average cost of capital (WACC) and discounted cash flow (DCF) analysis.
Portfolio Construction: Evaluate how adding an asset affects the overall risk-return profile of a portfolio based on its beta.
Performance Measurement: Calculate alpha by comparing actual returns to CAPM-predicted returns. Positive alpha indicates the investment outperformed its risk-adjusted benchmark.
Capital Budgeting: Set appropriate hurdle rates for new projects based on their systematic risk exposure.
Use the yield on 10-year government bonds as a proxy for the risk-free rate. The U.S. 10-year Treasury yield is the most common choice for dollar-denominated investments.
For beta, use data from financial databases like Bloomberg or Yahoo Finance. A two-year to five-year historical window with monthly returns is standard practice.
The S&P 500 average annual return of approximately 10% (or about 7% after inflation) serves as a common estimate for broad market return.
What are the limitations of CAPM?
CAPM assumes markets are efficient and investors hold diversified portfolios. It only captures systematic risk (market risk) and ignores unsystematic risk. Real-world factors like liquidity, transaction costs, and taxes are not accounted for.
Can CAPM be used for any asset?
CAPM applies to stocks, bonds, portfolios, and any asset with a measurable beta. It is most reliable for publicly traded securities with sufficient historical data to estimate beta accurately.
