CAPM Calculator

The Capital Asset Pricing Model (CAPM) estimates what return you should expect from an asset, given how much it moves with the broader market. William Sharpe and a few others built it in the 1960s, and it still sits behind most cost-of-equity calculations in corporate finance. This calculator runs the equation in either direction, so you can plug in what you know and read off whichever piece is missing: expected return, risk-free rate, beta, market return, or risk premium.

What is CAPM?

CAPM says investors deserve two kinds of return: one for waiting (the risk-free rate, usually a Treasury yield) and one for the risk the investment goes sideways (the risk premium). The full equation:

R = R_f + \beta \,(R_m - R_f)

R is the expected return of the asset, $R_f$ is the risk-free rate, and $R_m$ is what the broad market is expected to return. The $(R_m - R_f)$ piece is the market risk premium; multiply it by beta and you get the asset's own slice of that premium.

Beta tells you how the asset reacts when the market moves. A beta of 1 means it tracks the market. A beta of 1.5 means it tends to swing about 50% harder either way. A beta of 0.5 means it moves about half as much. Negative betas are rare; gold sometimes posts one during equity selloffs, which is part of why investors hold it as a hedge.

Quick example: Treasuries pay 4%, the market is expected to do 10%, and your stock has a beta of 1.2. CAPM puts the expected return at 4 + 1.2 × (10 − 4) = 11.2%.

How to use this calculator

Two modes are available. The simpler one works with expected return, the risk-free rate, and the risk premium directly. Fill in any two and the third lands in the empty field.

Full CAPM brings in beta and the market return as separate inputs. Give it any three of expected return, risk-free rate, beta, and market return, and the missing one fills itself in. Every rate field accepts percent, permille, or basis points; the dropdown next to the field switches between them.

Applications

The most common use is stock valuation. Compare CAPM's expected return against the stock's recent history and see whether you're paying more or less than the model thinks the risk justifies. Companies use the same number internally as their cost of equity, which feeds into WACC and any DCF model they run for projects or acquisitions.

Portfolio managers use CAPM to track how adding a high-beta or low-beta position shifts the whole portfolio's risk profile. After the fact, the gap between an investment's actual return and its CAPM-predicted return is alpha; positive alpha means the manager or the stock beat what the risk priced in. Capital budgeting teams use CAPM the same way to set hurdle rates, with riskier projects needing a higher bar to clear.

Tips for accuracy

For the risk-free rate, the 10-year US Treasury yield is the standard choice for dollar investments. For other currencies or horizons, pick a sovereign yield that matches.

Beta is usually one screen away in Bloomberg, Yahoo Finance, or your broker's research pages. The common convention is two to five years of monthly returns regressed against a broad index. If the company's capital structure has changed recently, the historical beta won't reflect the current risk profile, so re-lever it before plugging it in.

For the market return, a long-run estimate around 10% nominal (roughly 7% real) for the S&P 500 is the textbook default in the US. For long-horizon valuation work, a current implied equity risk premium (Damodaran publishes one annually) is more defensible than any single point estimate.

FAQ

What are the limitations of CAPM?

The model assumes efficient markets, well-diversified investors, and that only systematic risk gets priced. Real markets break those assumptions in obvious ways. Taxes, transaction costs, liquidity, and idiosyncratic shocks all matter, and CAPM ignores them. Fama and French argued for decades that size and value factors explain return patterns CAPM misses, which is why three-factor and five-factor extensions exist.

Can CAPM be used for any asset?

In theory, anything with a measurable beta. In practice, it works best on publicly traded equities with several years of clean price history. For private companies, the usual move is to take a public comparable's beta and re-lever it for the target's capital structure, which adds a fair bit of estimation noise. For thinly traded or one-of-a-kind assets, CAPM is rough at best.

How fresh should the inputs be?

Beta gets re-estimated quarterly, or after any major capital structure change. Treasury yields and the implied market return move daily, so for live valuation work, refresh those every time you run the model.