CAPM Calculator
Calculate the expected return on a stock or investment using the Capital Asset Pricing Model (CAPM). Enter the risk-free rate, market return, and beta — the calculator shows the expected return, market risk premium, and the risk premium for your specific investment.
What Is CAPM?
The Capital Asset Pricing Model (CAPM) calculates the return an investor should expect from an investment, given its risk relative to the market. It is the foundation of modern portfolio theory and one of the most widely used models in finance.
The idea is simple: investors should be compensated only for systematic risk — the risk that cannot be diversified away by holding a diversified portfolio. That risk is measured by beta. Higher beta means higher risk and higher expected return.
CAPM Formula
Expected Return = Risk-Free Rate + Beta × (Market Return − Risk-Free Rate)
- Risk-free rate — return on a safe asset (typically a 10-year government bond)
- Market return — expected return on the broader market (S&P 500 average around 8–10%)
- Beta — sensitivity of the stock to market movements
- Market risk premium — market return minus risk-free rate
Beta times the market risk premium gives the stock risk premium — the extra return the investor should demand for holding the stock instead of a risk-free asset.
Worked Example
Risk-free rate = 4%, market return = 10%, beta = 1.2:
Market risk premium = 10% − 4% = 6%
Stock risk premium = 1.2 × 6% = 7.2%
Expected return = 4% + 7.2% = 11.2%
Interpretation: this stock should return about 11.2% per year to compensate for its risk. If the stock is currently expected to return only 9%, it is overvalued. If it is expected to return 13%, it is undervalued.
How to Interpret Beta
- Beta = 1.0 (Market) — moves exactly with the market. Expected return equals market return.
- Beta > 1.0 (Aggressive) — more volatile than the market. Example: tech stocks, small-cap growth. Higher expected return, higher risk.
- Beta 0.5–1.0 (Defensive) — less volatile than the market. Example: utilities, consumer staples. Lower expected return, lower risk.
- Beta = 0 (Risk-Free) — no correlation with the market. Expected return equals risk-free rate.
- Beta < 0 (Rare) — inversely correlated with the market. Very few assets have this.
Frequently Asked Questions
What is a good beta?
There is no "good" beta in isolation — beta measures risk, not quality. A beta of 1.0 is the market average. Aggressive investors may prefer beta above 1.0 for higher expected returns; conservative investors prefer beta below 1.0 for stability. A beta around 0.7–1.3 covers most individual stocks.
Where do I find beta?
Beta is published on financial sites like Yahoo Finance, Bloomberg, and Morningstar. It is calculated by regressing the stock's historical returns against the market's returns. Different providers may show slightly different betas because they use different lookback periods (1-year, 3-year, 5-year) and different market benchmarks.
Why is CAPM controversial?
CAPM relies on strict assumptions: all investors are rational, markets are efficient, and returns are normally distributed. Real markets do not always behave that way. Empirically, low-beta stocks have outperformed CAPM's predictions — a phenomenon known as the low-volatility anomaly. Despite these criticisms, CAPM remains widely used because it is simple and gives a reasonable approximation for expected returns.
What is the market risk premium?
The market risk premium is the extra return the market offers over the risk-free rate — the price investors charge for bearing market risk. Historically it has been around 4–7% for the US stock market. Analysts often use 5–6% as a forward-looking assumption, though it varies over time and by country.
Can I use CAPM for any investment?
CAPM is designed for publicly traded stocks and diversified portfolios. It does not work well for private businesses (no observable beta), real estate, commodities, or start-ups. For those, other valuation approaches — DCF with risk-adjusted discount rates, comparable company analysis, or venture capital methods — are more appropriate.
How does CAPM relate to WACC?
CAPM calculates the cost of equity — one of the two inputs to WACC. A company's WACC uses the CAPM-derived cost of equity for the equity portion and the after-tax cost of debt for the debt portion. If CAPM shows a high cost of equity, WACC rises, which lowers valuations in DCF analysis.