Example
Input: Rf 3%, Beta 1.2, Rm 8%
Result: 9.0% Expected Return
Step-by-Step Guide
- 1 Risk-Free Rate
- Typically the 10-year Treasury yield.
- 2 Beta
- Measure of stock's volatility vs market.
- 3 Market Return
- Expected return of the market index.
- 4 Calculate
- Derive expected asset return.
What is CAPM Calculator: Expected Return?
The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk and expected return for assets, particularly stocks. It is used to price risky securities and generate expected returns for assets given that risk and cost of capital.
⚠️ Important: Financial figures generated here are for planning purposes. Actual results may vary based on market conditions and individual circumstances.
How it Works
Formula: $ E(R_i) = R_f + \beta_i (E(R_m) - R_f) $
Where Rf is risk-free rate, Beta is asset sensitivity, and (Rm - Rf) is the equity risk premium.
FAQ
What is Beta?
A beta of 1 means the stock moves with the market. >1 is more volatile.
What is Risk Premium?
The extra return expected for taking on risk (Rm - Rf).
Is CAPM perfect?
No, it assumes markets are efficient and ignores other factors (size, value).
Where to find Rf?
Look up 10-year government bond yields.
Can Beta be negative?
Yes, meaning the asset moves inversely to the market (e.g., gold sometimes).
Conclusion
CAPM helps investors determine if a stock is fairly valued given its risk. If the estimated return is less than the required return derived from CAPM, the stock may be overvalued.