Numeros
Categories Financial Calculators Health Calculators Math Calculators Date & Time Construction Engineering Physics Business Education Lifestyle Converters Generators
About

CAPM Calculator (Capital Asset Pricing Model)

By

Enter the risk-free rate, beta, and expected market return to calculate an asset's expected return using the Capital Asset Pricing Model.

CAPM Calculator

Live
Expected return (CAPM)
19.60%
Market risk premium
8.00%
Risk premium for this asset
13.60%
CAPM captures only systematic (market) risk, not company-specific risk. This is a theoretical model, not a guarantee of actual returns.

The formula

Expected return = Risk-free rate + Beta x (Expected market return - Risk-free rate) Market risk premium = Expected market return - Risk-free rate Asset risk premium = Beta x Market risk premium
Example

Risk-free rate 6%, beta 1.7, expected market return 14%: market risk premium of 8%, asset risk premium of 13.6% (1.7 x 8%) - an expected return of 19.6%, well above the market's own 14% because this asset is more volatile than the market.

Step-by-step guide

  1. Find the risk-free rate - typically the yield on a 10-year government bond (like a US Treasury) for the country the investment is based in.
  2. Find the asset's beta - a measure of how volatile it is relative to the overall market (beta of 1.0 moves with the market; above 1.0 is more volatile; below 1.0 is less volatile).
  3. Enter the expected market return and read the CAPM-implied expected return - the minimum return that should be required to justify the asset's level of market risk.

What beta actually captures - and what it misses

Beta measures only systematic risk - the portion of an asset's volatility that comes from broad market forces like interest rate changes, economic cycles, and geopolitical events, which can't be eliminated through diversification. CAPM deliberately ignores company-specific risk (a bad earnings report, a product recall, a lawsuit), on the theory that a well-diversified investor has already spread that kind of risk away across many holdings. This is why CAPM is best understood as a baseline for a diversified portfolio's expected return, not a prediction for how any single, concentrated holding will actually perform.

Common mistakes

Treating the CAPM output as a guaranteed or even likely actual return - it's a theoretical required return given the risk level, not a forecast of what will actually happen.
Using a stale or mismatched risk-free rate - the risk-free rate should reflect current conditions and ideally match the time horizon of the investment being evaluated.

Frequently asked questions

What does a beta greater than 1 actually mean?

It means the asset is more volatile than the overall market - if the market moves up or down by 1%, a stock with a beta of 1.7 would be expected to move about 1.7% in the same direction, on average.

What is CAPM used for in practice?

Common uses include estimating a company's cost of equity for valuation models, setting a hurdle rate for capital budgeting decisions, and benchmarking whether an investment's actual return justifies the risk it carries.

What's a major criticism of the CAPM model?

CAPM assumes markets are efficient and that beta alone fully captures relevant risk, assumptions that don't always hold in practice - real-world returns are influenced by many factors beta doesn't capture, which is why more complex multi-factor models were later developed.

Related calculators

See the full list of Financial calculators, or try: