CAPM Calculator
This CAPM calculator computes the expected return of an investment under the capital asset pricing model. Example: a risk-free rate of 3%, a beta of 1.2 and a market return of 8% give 9%.
Example: Risk-free rate r_f 3 % · Beta β 1.2 · Expected market return E(R_m) 8 % → Result: Expected return E(R) = 9 %. Source: Wikipedia – Capital asset pricing model (Sharpe 1964, Lintner 1965; Lehrbuch: Brealey/Myers/Allen, Principles of Corporate Finance). Updated: .
How it is calculated
The capital asset pricing model (CAPM) describes the return investors should require for a security given its market risk. The expected return is the risk-free rate plus a premium that grows with beta. The model goes back to Sharpe and Lintner and appears in every corporate finance textbook.
Formula
E(R) = r_f + β · (E(R_m) − r_f). The difference E(R_m) − r_f is the market risk premium. Beta measures how strongly the asset moves relative to the whole market: at β = 1 the expected return equals the market return, at β = 0 the risk-free rate, and above 1 it is higher.
Worked example
Risk-free rate 3%, expected market return 8%, beta 1.2. The market risk premium is 8% − 3% = 5%. The asset’s risk premium is 1.2 · 5% = 6%, so the expected return is 3% + 6% = 9%. In valuation this figure is often used as the cost of equity, for instance inside the WACC.
- Beta is estimated from historical returns against an index; the value depends on the period.
- The CAPM only prices market risk; assumptions and inputs remain yours.
Frequently asked questions
What is the CAPM?
The capital asset pricing model links the expected return of a security to its beta: risk-free rate plus beta times the market risk premium.
How do I interpret beta?
A beta of 1 means market risk, above 1 means above-average and below 1 below-average movement relative to the market. In the example, β = 1.2 adds a premium of 6%.
What is the result used for?
Often as the cost of equity in the WACC or as a discount rate in net present value. It is a model figure, not a promised return.
Sources and legal basis
- Wikipedia – Capital asset pricing model (Sharpe 1964, Lintner 1965; Lehrbuch: Brealey/Myers/Allen, Principles of Corporate Finance)
- Wikipedia – Capital Asset Pricing Model (deutsch)
As of: · Editorial policy
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