CAPM Calculator
What Return Does a Stock's Risk Actually Justify?
The Capital Asset Pricing Model answers a specific question: given how much systematic risk a stock carries relative to the market, what return should an investor demand to hold it? It's the theoretical backbone behind beta as a risk measure, connecting the risk-free rate, the stock's beta, and the broader market's expected return into a single expected-return figure that analysts use as a benchmark for whether an investment is fairly priced.
The Formula
The term (Market Return − Risk-Free Rate) is the equity risk premium — the extra return the market as a whole is expected to deliver over a risk-free asset. Multiplying it by beta scales that premium up or down based on the individual stock's sensitivity to market moves.
Where This Matters
- Setting a discount rate — CAPM's output is a standard input to the cost of equity used in discounted cash flow valuation and WACC calculations.
- Judging whether a stock is fairly valued — comparing a stock's actual historical return to its CAPM-predicted return is one basic way analysts flag potential mispricing (this is, in fact, the same comparison that produces alpha).
- Portfolio construction — CAPM gives a theoretical basis for expecting higher-beta stocks to command higher average returns over time, informing how much risk to take on for a given return target.
Worked Example
| Step | Value |
|---|---|
| Equity risk premium (Market − Risk-Free) | 6.0% |
| Beta × Equity risk premium | 7.2% |
| Expected return | 10.2% |
3% + 1.2 × 6% = 10.2%. A beta of 1.2 means the stock is expected to earn 1.2 times the market's risk premium above the risk-free rate.
How to Use This Calculator
- Enter the risk-free rate (commonly a Treasury yield matching your time horizon).
- Enter the stock or portfolio's beta.
- Enter the expected market return.
- Select Calculate to get the CAPM expected return and the underlying equity risk premium.
Related Calculations
Feed this expected return into the WACC Calculator for a full cost-of-capital figure, or compare it against actual performance with the Portfolio Alpha Calculator.