CAPM Calculator

Calculate expected returns using the Capital Asset Pricing Model. Essential for investment analysis, portfolio management, and risk assessment.

Calculate Expected Return

%

Treasury bond yield

%

Expected market return

Asset's systematic risk

CAPM Formula: Expected Return = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate)

Results

Expected Return

0.00%

CAPM expected return

Key Metrics

Beta (β): 0.00
Risk-Free Rate: 0.00%
Market Return: 0.00%
Market Risk Premium: 0.00%

Risk Analysis

Risk Level: -
Volatility vs Market: -
Risk Premium: -

Investment Grade

-
Calculate to see investment grade

Interpretation

Enter values to see CAPM analysis and investment recommendations.

Security Market Line (SML)

Understanding CAPM

The Capital Asset Pricing Model (CAPM) is a fundamental financial model that describes the relationship between systematic risk and expected return for assets, particularly stocks.

Key Components

  • Risk-Free Rate (Rf): Return on risk-free securities (e.g., Treasury bonds)
  • Beta (β): Measure of systematic risk relative to the market
  • Market Return (Rm): Expected return of the market portfolio
  • Market Risk Premium: Rm - Rf, compensation for market risk

CAPM Formula

Expected Return = Rf + β × (Rm - Rf)

Where:

  • Rf = Risk-free rate
  • β = Beta (systematic risk)
  • Rm = Market return
  • (Rm - Rf) = Market risk premium

Beta Interpretation

  • β = 1: Asset moves with the market
  • β > 1: Asset is more volatile than market (aggressive)
  • β < 1: Asset is less volatile than market (defensive)
  • β = 0: Asset is uncorrelated with market
  • β < 0: Asset moves opposite to market

Applications and Limitations

Applications

  • Portfolio Management: Asset allocation and risk assessment
  • Investment Analysis: Evaluating expected returns
  • Cost of Equity: Determining required return for equity financing
  • Performance Evaluation: Risk-adjusted performance measurement
  • Capital Budgeting: Discount rate for project evaluation

CAPM Assumptions

  • Investors are rational and risk-averse
  • Perfect capital markets (no transaction costs)
  • Homogeneous expectations about returns
  • Single-period investment horizon
  • Risk-free borrowing and lending available

Limitations

  • Unrealistic Assumptions: Perfect markets don't exist
  • Beta Instability: Beta changes over time
  • Single Factor Model: Only considers market risk
  • Historical Data: Based on past performance
  • Market Portfolio: True market portfolio is unobservable

Alternative Models

  • Fama-French Three-Factor Model: Adds size and value factors
  • Arbitrage Pricing Theory (APT): Multiple risk factors
  • Dividend Discount Model: Based on dividend expectations
  • Black-Litterman Model: Incorporates investor views