CAPM Calculator
Find the expected return using the CAPM model.
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How it works
The capital asset pricing model, or CAPM, estimates the return an investor should expect from an asset given its risk, and this calculator applies it directly. It starts from the risk-free rate, the return on a safe investment such as a government bond, and adds a risk premium proportional to how volatile the asset is relative to the whole market. That sensitivity is captured by beta: a beta of one means the asset moves in line with the market, a beta above one means it amplifies market swings and therefore demands a higher expected return, and a beta below one means it is more defensive and requires less. The market risk premium, the extra return investors expect from stocks over the risk-free rate, is multiplied by beta and added to the base. CAPM is the standard method for estimating the cost of equity, which in turn feeds into the weighted average cost of capital used to discount cash flows in valuation. It is also used to judge whether an investment offers enough return for its risk. Although the model rests on simplifying assumptions, it remains a cornerstone of modern finance. Enter the risk-free rate, beta, and expected market return to compute the expected return.
E(R) = Rf + β·(Rm − Rf)
The capital asset pricing model says an asset's expected return equals the risk-free rate plus a risk premium. The premium is the asset's beta, which measures how sharply it moves with the overall market, multiplied by the market risk premium, which is the expected market return minus the risk-free rate. A beta of one earns the full market premium; higher betas demand more return for more risk, and lower betas demand less.
Source:Capital asset pricing model (Sharpe)
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Worked example
How to use this calculator
- 1
Enter your values
Enter risk-free rate, beta and expected market return.
- 2
Adjust the options
Fine-tune any options to match your situation.
- 3
Read your result
Expected return (cost of equity) updates instantly as you type — no button to press.
Frequently asked questions
What is the capital asset pricing model?
The capital asset pricing model is a formula that estimates the expected return of an investment based on its risk relative to the market. It adds a risk premium to the risk-free rate, where the premium equals the asset's beta times the market risk premium. CAPM is widely used to estimate the cost of equity and to assess whether an asset's expected return justifies its risk.
What does beta measure?
Beta measures how much an asset's price tends to move relative to the overall market. A beta of one means it moves in step with the market, above one means it is more volatile and amplifies market moves, and below one means it is more stable and dampens them. Higher beta implies higher risk, so CAPM assigns it a higher expected return.
What is the risk-free rate?
The risk-free rate is the return you can earn on an investment considered to have virtually no risk of default, typically a short-term government bond such as a Treasury bill. It represents the baseline compensation for the time value of money before adding any premium for risk. CAPM builds every expected return on top of this foundation.
How is CAPM used to find the cost of equity?
The expected return CAPM produces for a company's stock is, by definition, the cost of equity, the return shareholders require for holding that stock. This cost of equity then feeds into the weighted average cost of capital, which serves as the discount rate in valuation. CAPM is therefore a key bridge between an asset's risk and the rate used to value it.
What are the limitations of CAPM?
CAPM relies on simplifying assumptions: that beta fully captures risk, that markets are efficient, and that investors can borrow and lend freely at the risk-free rate. In reality, beta is estimated from past data and can be unstable, and other factors like company size and value characteristics also affect returns. Despite these flaws, CAPM remains a useful and widely taught starting point.