This CAPM calculator computes the expected return an asset must offer for its risk — the Capital Asset Pricing Model’s E(R) = Rf + β(Rm − Rf) — the required return that feeds stock valuation, WACC and project hurdle rates.

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One Line That Prices All Risk

The Capital Asset Pricing Model makes a startling claim: an asset’s required return depends on exactly ONE of its risks — its sensitivity to the overall market, beta. E(R) = Rf + β × (Rm − Rf): start with the risk-free rate (compensation for time), add beta times the market risk premium (compensation for risk that cannot be diversified away). The defaults — Rf 3%, β 1.2, market return 10% — give a premium of 7%, a risk charge of 1.2 × 7 = 8.4%, and an expected return of 11.4%. A β of 1.0 earns the market’s return; 0.5 earns half the premium (6.5% here); an aggressive β of 2.0 demands 17%. Sharpe, Lintner and Mossin derived this in the 1960s from a single insight: because investors can diversify, the market only pays for risk that diversification cannot remove — the asset’s tendency to fall exactly when everything falls. The stock-specific drama (a CEO scandal, a product recall) nets out across a portfolio, so nobody is compensated for bearing it, so it does not enter the price of risk.

CAPM’s working life is enormous for such a short formula. It IS the cost of equity in most WACC calculations, hence the discount rate inside most DCF valuations on Earth. It sets regulated utilities’ allowed returns in rate cases argued before commissions. It supplies the benchmark for Jensen’s alpha — the measure of whether a fund manager beat what mere beta exposure would have earned. Its known weaknesses are equally famous: beta is estimated from history and wobbles; the model is one-factor in a multi-factor world (the Fama–French size and value factors exist because CAPM alone leaves patterns unexplained); and the “market portfolio” of theory includes assets no index captures. Practitioners use it anyway — adjusted, sanity-checked, triangulated — because it forces the right question: how much of this return is just paid-for market exposure, and how much is genuinely extra?

Worked Examples (Verified)

  • Defaults: Rf 3%, β 1.2, Rm 10% → premium 7%, E(R) = 3 + 1.2 × 7 = 11.4%.
  • Market-tracking asset: β 1.0 → E(R) = 10% — the market return itself, by definition.
  • Defensive asset: β 0.5 → 3 + 0.5 × 7 = 6.5%.
  • Risk-free in disguise: β 0 → E(R) = 3% — no market sensitivity, no premium.

CAPM Discipline

  • Beta is the fragile input: published betas for the same stock differ by source and window (2-year weekly vs 5-year monthly). State yours; sensitivity-test ±0.2.
  • The market risk premium is an assumption dressed as data — historical US premiums run ~4.5–6% over bills; the Rm − Rf you enter embeds your choice. Consistency across a valuation matters more than the point estimate.
  • Match Rf to the horizon and currency of the cash flows — a 10-year Treasury for a long DCF, in the same currency as the projections.
  • CAPM gives a REQUIRED return, not a forecast: a stock expected to return less is overpriced in the model, not predicted to fall.
  • Negative betas exist (some gold and hedging assets) and correctly produce required returns BELOW the risk-free rate — insurance is allowed to cost money.

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Frequently Asked Questions

How do you calculate CAPM?

E(R) = Rf + β(Rm − Rf): the risk-free rate, plus beta times the market risk premium (expected market return minus the risk-free rate). With Rf 3%, β 1.2 and Rm 10%: the premium is 7%, the risk charge is 8.4%, and the expected (required) return is 11.4%. This calculator shows the premium and the total — enter any published beta and your market assumptions and it prices the asset’s required return, which doubles as its cost of equity.

What is beta in CAPM?

Beta measures how strongly an asset moves with the overall market: β = covariance(asset, market) ÷ variance(market), estimated by regressing the asset’s returns on the market’s. β 1.0 = moves with the market; 1.2 = amplifies moves ~20%; 0.5 = half as reactive; 0 = insensitive; negative = tends to move against the market. It is the ONLY risk CAPM prices, because it is the risk a diversified investor cannot shed. Published betas (Yahoo, Bloomberg) differ by estimation window — a known soft spot of the model.

What is the market risk premium?

Rm − Rf: the extra return investors demand for holding the risky market portfolio instead of the risk-free asset. Long-run US history suggests roughly 4.5–6% over Treasury bills. In this calculator you supply it implicitly through your market-return input (10% market with 3% risk-free = 7% premium, at the generous end). Because the premium multiplies beta, it is the second-most-consequential assumption in the model — valuations built on a 7% premium and a 4.5% premium are different valuations.

How is CAPM used in WACC and DCF valuation?

CAPM supplies the cost of equity (Re), which WACC blends with the after-tax cost of debt by market-value weights. That WACC then discounts the projected cash flows in a DCF. So CAPM’s three inputs sit upstream of most corporate valuation: raise beta or the premium and the discount rate rises, the present value falls. It is also the r in the dividend discount model — the required return the perpetuity formula divides by — which is why CAPM and the DDM are paired tools.

What are the limitations of CAPM?

One factor in a multi-factor world: empirical work (Fama–French) shows size and value patterns CAPM cannot explain; beta is unstable across periods and sources; the true “market portfolio” (all risky assets, including real estate and human capital) is unobservable, so index proxies stand in; and the model assumes frictionless markets and identical investor expectations. The professional posture: use CAPM as the disciplined baseline, cross-check with multi-factor and build-up methods, and treat its output as a range, not a point.

What does a negative beta mean?

The asset tends to rise when the market falls — true portfolio insurance. CAPM then assigns a required return BELOW the risk-free rate (β −0.2 at the defaults gives 3 − 1.4 = 1.6%), which is rational: investors accept sub-risk-free returns for an asset that pays off in crises, just as they pay premiums for insurance. Genuine negative-beta assets are rare and their betas are especially unstable, so the result is best read as “this behaves like a hedge” rather than a precise price.

Is expected return in CAPM a prediction?

No — it is an equilibrium REQUIREMENT. CAPM says: given this beta, the asset must be expected to return 11.4% for investors to willingly hold it at its current price. If your own forecast is 15%, the gap (alpha) says the asset is underpriced relative to the model; if 8%, overpriced. Realized returns will scatter widely around the requirement — the model prices the average compensation for risk, not next year’s outcome, and confusing the two is the beginner’s classic misreading.

Is this CAPM calculator free?

Yes — free, instant, no sign-up. Enter the risk-free rate, beta and expected market return for the market risk premium and the CAPM expected return.