CAPM Calculator
Estimate a stock's expected return and cost of equity using the Capital Asset Pricing Model, risk-free rate, beta, and market-return assumptions.
CAPM is an educational model, not a prediction. Inputs such as beta and market-risk premium are uncertain and can materially change the estimate.
CAPM expected return
9.50%
4.00% + 1.10 × 5.00% market risk premium
Market risk premium
5.00%
Beta risk premium
5.50%
Target-return gap
0.50%
Market expected return
9.00%
Your target is 0.50 percentage points above this CAPM estimate. This is a comparison, not a forecast or recommendation.
CAPM sensitivity visualizer
See how beta changes expected return under your selected market assumptions.
CAPM Calculator
This CAPM calculator estimates a stock's expected return using the Capital Asset Pricing Model. Enter a risk-free rate, the stock's beta, and your expected market return. The calculator calculates the market risk premium, beta-adjusted risk premium, expected return, and comparison with a personal target return. It is useful for learning valuation concepts and testing transparent cost-of-equity assumptions.
CAPM is a foundational finance model that connects expected return to systematic market risk. The formula is expected return equals risk-free rate plus beta multiplied by market return minus risk-free rate. In shorthand: E(R) = Rf + beta × (Rm − Rf). The model is simple enough for a calculator but depends heavily on uncertain inputs, so treat its result as a scenario rather than a guarantee.
How to Calculate Expected Return Using CAPM
The CAPM formula has three inputs. The risk-free rate is the assumed return on a very low-risk asset. Beta measures historical market sensitivity. The market return is the expected return for the benchmark portfolio. First subtract the risk-free rate from market return to find market risk premium. Then multiply that premium by beta and add the risk-free rate.
For example, with a 4% risk-free rate, beta of 1.1, and 9% expected market return, the market risk premium is 5%. Beta-adjusted premium is 1.1 × 5%, or 5.5%. Add 4% and expected return is 9.5%. This calculator shows every component so you can test the impact of a different beta or market assumption.
What Is the Capital Asset Pricing Model?
The Capital Asset Pricing Model, commonly called CAPM, is a financial model used to estimate the return investors require for bearing systematic market risk. It is commonly used in corporate finance, equity research, portfolio analysis, and valuation. Analysts may treat the CAPM result as a cost of equity when discounting future cash flows or comparing a security with a required return.
CAPM separates market risk from company-specific risk. The idea is that diversified investors can reduce much of a single company's unique risk, so expected return should compensate mainly for market-related risk represented by beta. This is a useful framework, but real markets include liquidity, size, value, momentum, credit, behavioral, and other factors that CAPM may not capture.
Risk-Free Rate in CAPM
The risk-free rate is the starting point for the CAPM calculation. Analysts often use a current government security yield matched broadly to the investment horizon and currency, but there is no single universal choice. Short-term rates can differ from long-term bond yields, and inflation expectations, credit conditions, and central-bank policy can change rates over time.
Use a consistent rate for the currency and time horizon of your analysis. If you are valuing a long-lived business, a short-term cash rate may not be the best conceptual match. Record the source date and rationale for any input. This calculator accepts your assumption rather than fetching a live rate, allowing you to compare multiple reasonable scenarios without treating one market number as permanent.
Beta and Expected Stock Return
Beta scales the market risk premium. A beta of 1 implies market-like historical sensitivity; beta above 1 adds more than the market premium; beta below 1 adds less. With a 5% market risk premium, beta 0.5 contributes 2.5%, beta 1 contributes 5%, and beta 1.5 contributes 7.5% to expected return before adding the risk-free rate.
Beta is an estimate rather than a fixed property. It changes with benchmark selection, data window, return frequency, leverage, business mix, and market conditions. A historical beta can be unstable, especially for newly listed, thinly traded, highly leveraged, or rapidly changing companies. Run a range of beta inputs instead of placing too much weight on one published figure.
Market Return and Equity Risk Premium
The expected market return is your view of what the benchmark portfolio may return over the relevant horizon. Subtracting risk-free rate from it produces the equity or market risk premium. Many analyses use a long-run historical premium, an implied premium from current prices and expected cash flows, or a forward-looking assumption. Each method has limitations and can give a different answer.
A higher assumed market risk premium raises CAPM expected return, especially for higher-beta stocks. Document the source and period behind your assumption. Avoid mixing a short-term risk-free yield with a market premium constructed for a different currency, geography, or horizon without adjustment. The value of a CAPM calculation comes from transparent, internally consistent assumptions more than false precision.
CAPM as Cost of Equity
In company valuation, CAPM expected return is often used as cost of equity. It represents the return shareholders may require for the market risk they bear. Cost of equity can feed into a weighted average cost of capital calculation when combined with debt costs and capital structure. A higher cost of equity reduces the present value of future cash flows in a discounted cash flow model.
Do not treat CAPM output as the only valid discount rate. Private companies, small companies, illiquid securities, early-stage ventures, country exposure, and concentrated ownership can require additional judgment. Analysts may use size premiums, company-specific adjustments, build-up approaches, or multiple scenarios. Any discount-rate choice should be explained and tested against reasonable alternatives.
CAPM Sensitivity Analysis
Sensitivity analysis shows how a result changes when assumptions move. The chart on this page holds your risk-free rate and market-risk premium constant while varying beta from 0 to 2. A separate scenario can test higher or lower market return assumptions. This is more informative than presenting a single expected return as if it were certain.
For a valuation or investment review, consider a base case, cautious case, and optimistic case. Change beta, risk-free rate, and market risk premium in ways that are economically plausible. If a conclusion depends entirely on one narrow assumption, acknowledge the uncertainty. A range helps connect a mathematical model to real-world decision risk.
CAPM Limitations
CAPM makes simplifying assumptions about investors, diversification, borrowing, lending, taxes, and market efficiency. Empirical evidence has found that beta alone does not explain all differences in returns. Factors such as company size, valuation, profitability, investment, momentum, liquidity, and sentiment may also matter. Historical relationships can shift abruptly during crises or changes in business conditions.
The model estimates required return, not a promise of realized return. A stock can beat or miss its CAPM expected return for years. Use CAPM as one analytical lens alongside fundamentals, valuation, cash flow, competitive position, balance-sheet strength, scenario analysis, and risk management. A simple model is valuable when its limitations are understood.
Common CAPM Calculation Mistakes
Frequent mistakes include using beta as a percentage, forgetting to subtract risk-free rate from market return before multiplying by beta, and mixing annual with monthly assumptions. Another error is calling the output a guaranteed future return. Make sure all inputs refer to the same currency, market, and general time horizon.
Avoid selecting inputs only to justify a desired price or return. Record how beta, risk-free rate, and market premium were chosen, then test alternatives. A precise result such as 9.47% can still be highly uncertain if the inputs are rough estimates. Round results appropriately and focus on the decision implications of a range rather than a single decimal.
CAPM Calculator FAQ and Disclaimer
What is the CAPM formula? Expected return equals risk-free rate plus beta times market return minus risk-free rate. What does CAPM calculate? It estimates a required or expected return based on systematic market risk. Is CAPM the same as guaranteed return? No, it is a model estimate. What is market risk premium? It is expected market return minus risk-free rate.
This free CAPM expected return calculator is for educational research only and is not investment, financial, tax, accounting, or legal advice. CAPM inputs and outputs are uncertain and historical beta does not predict performance. Investments can lose value. Verify assumptions and consult a qualified adviser before making investment or valuation decisions.
Frequently Asked Questions
How do you calculate CAPM expected return?
Add the risk-free rate to beta multiplied by the market return minus risk-free rate.
What is market risk premium?
Expected market return less the risk-free rate.
Is CAPM used for cost of equity?
Yes, it is commonly used as one method to estimate cost of equity in valuation.
Does CAPM predict stock returns?
No. It is an assumption-based model, not a reliable forecast of realized returns.