FinancePortfolio TheoryA-Level
AQAAPOntarioNSWCBSEGCE O-LevelMoECAPS

CAPM (Expected Return) Calculator

Capital Asset Pricing Model.

Use the free calculatorCheck the variablesOpen the advanced solver
Open Advanced Calculator
This is the free calculator preview. Advanced walkthroughs stay in the app.
Result
Ready
Expected Return

Formula first

Overview

The Capital Asset Pricing Model (CAPM) defines the relationship between the expected return of an investment and its systematic risk. It asserts that the return on an asset should equal the risk-free rate plus a risk premium based on the asset's sensitivity to market movements.

Symbols

Variables

E[R_i] = Expected Return, R_f = Risk-Free Rate, \beta = Beta, R_m = Market Return

Expected Return
Risk-Free Rate
Beta
Market Return

Apply it well

When To Use

When to use: Use this formula to estimate the required rate of return for a stock or to calculate the cost of equity for a company's capital structure. It is most effective when evaluating assets within a diversified portfolio where idiosyncratic risk has been neutralized.

Why it matters: It provides a foundational benchmark for pricing risky securities and determining hurdle rates for corporate investment projects. By quantifying the trade-off between risk and reward, it allows investors to determine if a security is fairly valued relative to its market risk.

Avoid these traps

Common Mistakes

  • Confusing risk-free rate with market return.
  • Swapping signs.

One free problem

Practice Problem

A tech stock has a beta of 1.2. The current yield on a 10-year Treasury note is 3%, and the overall market is expected to return 10%. What is the expected return for this stock?

Risk-Free Rate0.03
Beta1.2
Market Return0.1

Solve for:

Hint: Subtract the risk-free rate from the market return to find the market risk premium before multiplying by beta.

The full worked solution stays in the interactive walkthrough.

References

Sources

  1. Brealey, Myers, and Allen, Principles of Corporate Finance
  2. Ross, Westerfield, and Jaffe, Corporate Finance
  3. Wikipedia: Capital asset pricing model
  4. Britannica: Capital asset pricing model
  5. Brealey, Myers, and Allen, Principles of Corporate Finance, 13th ed.
  6. Bodie, Zvi, Alex Kane, and Alan J. Marcus. Investments. McGraw-Hill Education.
  7. Brealey, Richard A., Stewart C. Myers, and Franklin Allen. Principles of Corporate Finance. McGraw-Hill Education.
  8. Sharpe, William F. "Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk." The Journal of Finance, vol. 19, no.