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CAPM Calculator

Estimate the return to expect from an investment with the capital asset pricing model (CAPM), from the risk-free rate, its beta and the expected market return.

Level: Grades 7–8

Printable worksheet

CAPM Calculator

Know the answer you need? Pick an input to work backward.

Inputs

The yield on a government bond or bill that lasts about as long as your investment.

How strongly the asset moves with the market. 1 means in step with it.

Result

Expected return (cost of equity)

11.2%

With a beta of 1.2, CAPM gives an expected return of 11.2%: 4% risk-free plus 7.2% for risk.

Market risk premium
6%
Asset risk premium (β × market premium)
7.2%

See the step-by-step solution ↓

Step-by-step solution

  1. Find the market risk premium, the extra return for owning the market instead of a safe investment: market return minus the risk-free rate

    10%−4%=6%

  2. Multiply that premium by beta, because a riskier asset should earn a bigger reward. This is the asset's own risk premium

    1.2×6%=7.2%

  3. Add the asset's premium to the risk-free rate to get its expected return, E(R)

    E(R)=4%+1.2×(10%−4%)=11.2%

Test yourself

20 quick questions built from this calculator's formula: work out results, predict what happens when an input changes, and work backward from an answer. Every answer comes with the working.

Please note: Results are estimates for planning and comparison. Lenders, banks, and tax authorities may round differently or include fees not modeled here, so confirm figures with your provider before deciding.

What this calculator does

Estimate the return you should expect from a stock or portfolio, given how risky it is compared with the market. This calculator uses the capital asset pricing model, usually shortened to CAPM, a classic tool for the job. It starts with the return on a risk-free investment, such as a government bond. Then it adds a reward for taking on risk. That reward grows with the asset's beta, a measure of how much it swings with the market.

Enter the risk-free rate, the asset's beta and the return you expect from the market as a whole. The calculator shows the market risk premium, the extra return for owning the market instead of a safe investment. It also shows how much of that premium this asset earns, and the resulting expected return. In company finance, this expected return is often used as the cost of equity, the return shareholders require, when valuing a company or a project.

Where it's used

Why this math matters outside the classroom:

  • Expected return. With a 4% risk-free rate, a 10% market return and a beta of 1.2, the model gives 4% + 1.2 × 6% = 11.2%.
  • Cost of equity. Analysts use the model's expected return as a company's cost of equity when valuing its future cash flows.
  • Comparing stocks. A stock with a beta of 0.8 gets a lower required return than one with a beta of 1.5 under the same market inputs.
  • Finance homework. Students plug a risk-free rate, beta and market premium into the formula and interpret the result as a percent per year.

How to use it

  1. Enter the risk-free rate. That's usually the yield on a government bond that matures around the end of your time horizon.
  2. Enter the asset's beta. Get it from a data provider, or from your own regression, a statistical fit of its returns against the market's.
  3. Enter the return you expect from the overall market over the same time period.
  4. Read the expected return and the two risk premiums.

What the inputs mean

Risk-free rate
Use the same time period and currency as the market return. Short-term bill yields suit short time periods, and longer bond yields suit long-term valuations.
Beta (β)
A beta of 1 means the asset tends to move with the market. Above 1, it swings more than the market. Between 0 and 1, it swings less. Below 0, it tends to move the opposite way.
Expected market return
Use a long-run expectation for a broad market index, not last year's result. Many analysts work with a market risk premium directly. If you have one, enter the risk-free rate plus that premium here.

Formula and method

Market risk premium = Rm − Rf
Asset risk premium = β × (Rm − Rf)
E(R) = Rf + β × (Rm − Rf)

Rf is the risk-free rate, Rm is the expected market return and β (beta) is the asset's beta. E(R) is the asset's expected return. All rates are in percent, over the same period. The market risk premium, Rm − Rf, is the extra return investors want for holding the market instead of a risk-free asset.

CAPM says only market-wide risk, measured by beta, earns a reward. Risk tied to one company can be spread away by owning many companies (diversifying). So the asset's premium is the market premium scaled by its beta. The expected return is that premium added on top of the risk-free rate.

Worked example

A stock has a beta of 1.2. The risk-free rate is 4% and you expect the market to return 10% a year.

  1. Market risk premium: 10% − 4% = 6%.
  2. Stock's risk premium: 1.2 × 6% = 7.2%.
  3. Expected return: 4% + 7.2% = 11.2%.

Result: CAPM gives an expected return of 11.20% a year for the stock.

Understanding the result

The expected return is the least an investor would want, on average, for taking on the stock's market risk. If you think the stock will return more than this, CAPM suggests it's attractively priced. If less, it isn't paying enough for its risk.

As a cost of equity, the figure is the discount rate for the cash that belongs to shareholders. A higher beta raises the cost of equity, which lowers what those future cash flows are worth today.

Assumptions and limitations

  • Beta captures all the risk that matters to an investor who owns a wide mix of investments.
  • The risk-free rate, market return and beta all cover the same period and currency.
  • Expected return rises in a straight line with beta.
  • Nothing is rounded inside the calculation.
  • CAPM is a model, not a forecast. Its inputs are estimates, and small changes in the market return or beta change the answer noticeably.
  • Betas worked out from past prices can drift over time, and they differ between data sources.
  • Studies have found that factors besides beta, such as company size and valuation, also help explain returns. Multi-factor models deal with this.

Frequently asked questions

Where do I find a stock's beta?

Most financial data sites list a beta for public companies. It's usually measured against a major index over a few years of returns. You can also estimate it yourself with a regression of the stock's returns on the market's returns.

Can expected return from CAPM be lower than the risk-free rate?

Yes, if beta is negative, or if the expected market return is below the risk-free rate. An asset with a negative beta tends to rise when the market falls. So investors may accept a lower return for the protection it offers.

What is the difference between the market risk premium and the asset's risk premium?

The market risk premium is the extra return expected from the whole market over the risk-free rate. The asset's risk premium is that figure times its beta. It's larger for a more volatile (jumpier) stock and smaller for a steadier one.

Is CAPM the same as the cost of equity?

CAPM is one common way to estimate the cost of equity. Others include the dividend growth model and multi-factor models. Analysts often compare several methods before settling on a figure.

How this calculator is checked

Method: Capital asset pricing model: E(R) = Rf + β(Rm − Rf). The calculation is covered by automated tests with known reference values and edge cases. Last updated 2026-10-18. Found a problem? Tell us.

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