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CAPM Calculator

Calculate the expected rate of return for an asset using the Capital Asset Pricing Model (CAPM) based on risk-free rate, beta, and market return.

Last updated: July 2026

CAPM Model Inputs

Presets:
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Understanding Asset Beta (β):

* **Beta = 1.0**: The asset's price moves in perfect lockstep with the market.
* **Beta > 1.0**: The asset is more volatile than the market (e.g. technology stocks). Offers higher expected returns but higher risk.
* **Beta < 1.0**: The asset is less volatile than the market (e.g. utility stocks). Lower risk, lower expected returns.

Expected Rate of Return (CAPM)

9.72%

Cost of Capital Breakdown

Formula Breakdown

CAPM Required Return Equation

E(R) = Rf + β × (Rm - Rf)

The Capital Asset Pricing Model (CAPM) Framework

CAPM is the benchmark financial model used by corporate finance professionals and portfolio managers to establish the required rate of return for a risky asset based on its systematic market risk.

Understanding Beta and Systematic Risk

Systematic risk (market-wide risk) cannot be eliminated through diversification. Beta (β) quantifies an asset's sensitivity relative to the broader market. A beta of 1.0 indicates market-level volatility; beta > 1.0 indicates higher volatility (aggressive growth); beta < 1.0 indicates lower volatility (defensive stocks).

The CAPM Formula

Expected Return = Rf + Beta * (Rm - Rf)

Where Rf is the risk-free rate (e.g., 10-year US Treasury yield), Beta is the asset's sensitivity coefficient, and (Rm - Rf) represents the equity market risk premium.

Applying CAPM in Portfolio Construction

  • Assess Hurdle RatesCompanies use CAPM to calculate their Cost of Equity, setting the minimum return benchmark for evaluating major capital investments.
  • Balance Portfolio BetaPair high-beta growth stocks with low-beta dividend aristocrats or utilities to achieve an overall portfolio beta close to 1.0.
  • Evaluate AlphaAlpha measures whether an active fund manager actually generated returns above the expected benchmark return predicted by CAPM.

Frequently Asked Questions

What is the Capital Asset Pricing Model (CAPM)?

CAPM calculates an asset's expected return based on its risk relative to the overall market, using the formula: Expected Return = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate).

What does Asset Beta (β) represent?

Beta measures an asset's volatility compared to the broader market. A beta of 1.0 indicates market-level volatility; above 1.0 indicates higher volatility, and below 1.0 indicates lower volatility.

What is the Risk-Free Rate?

The risk-free rate is the theoretical rate of return of an investment with zero risk of default, typically represented by long-term government bond yields (like 10-year US Treasuries).

What is the Market Risk Premium?

The market risk premium is the additional return investors demand for choosing risky market equities over risk-free government securities.

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