About the CAPM Calculator
This CAPM calculator applies the capital asset pricing model to estimate the return investors should require from a stock given its market risk. Enter the risk-free rate, the stock’s beta and the expected return on the market, and it returns the expected (required) return, the market risk premium and the stock’s risk premium, along with a chart of the security market line.
Analysts use the CAPM result as the cost of equity in discounted cash-flow valuations and in the weighted average cost of capital (WACC). Investors use it as a hurdle rate: if you expect a stock to return less than its CAPM figure, you are not being paid for the market risk it carries. Enter the return you actually expect or achieved to see Jensen’s alpha, the excess over the CAPM benchmark.
CAPM is a simplified single-factor model. Results depend heavily on the inputs you choose — which risk-free rate, which beta estimate and which market premium — so it is best used to compare opportunities consistently rather than as a precise forecast.
With the default inputs, the expected return (cost of equity) is 11.16%. Change any value above to recalculate instantly.
How to use the capm calculator
- 1Enter the risk-free rate, such as the current 10-year Treasury yield.
- 2Enter the stock’s beta from a data provider or the beta calculator.
- 3Enter the expected market return (risk-free rate + your equity risk premium).
- 4Optionally enter your forecast or actual return to see Jensen’s alpha.
- 5Use the expected return as the discount rate or cost of equity in valuations.
Formula and method
CAPM says an asset’s expected return equals the risk-free rate plus a premium for systematic (market) risk. That premium is the stock’s beta multiplied by the market risk premium — the expected market return minus the risk-free rate. A stock with a beta of 1 is expected to earn the market return; a beta of 1.5 earns one and a half times the market premium.
Plotting required return against beta gives the security market line shown in the chart. Jensen’s alpha is the difference between an asset’s actual (or forecast) return and its CAPM return; a positive alpha means it outperformed what its market risk alone would justify. Company-specific risk is assumed to be diversified away and is not rewarded.
- E(Ri)
- Expected (required) return on the asset
- Rf
- Risk-free rate
- βi
- Beta of the asset
- E(Rm)
- Expected return of the market
- α
- Jensen’s alpha
Worked examples
Large-cap stock with β = 1.2
The market premium is 10% − 4.2% = 5.8%. Multiplying by beta 1.2 gives a 6.96% risk premium, so the required return is 4.2% + 6.96% = 11.16%. A 12% expected return beats that by 0.84 points of alpha.
Defensive utility stock
With a 5% market premium, a 0.8 beta adds 4%, for an 8% required return. A 7% expected return is 1 point below that, so on a CAPM basis the stock is not paying enough for its risk.
High-beta tech stock
A 7.5% market premium times beta 1.5 gives an 11.25% risk premium, so investors should require 3.5% + 11.25% = 14.75%. A forecast of 15% leaves only a thin 0.25% alpha.
Frequently asked questions
What is the CAPM formula?+
Expected return = risk-free rate + beta × (expected market return − risk-free rate). For example, with a 4% risk-free rate, a beta of 1.2 and a 10% market return, the expected return is 4% + 1.2 × 6% = 11.2%.
What risk-free rate should I use in CAPM?+
For valuing long-lived assets most analysts use the yield on a 10-year government bond in the same currency as the cash flows. For short-term performance measurement a 3-month Treasury bill yield is more common. Stay consistent across the companies you compare.
What is a typical market risk premium?+
Estimates of the US equity risk premium commonly range from about 4% to 6% above government bond yields, depending on the method and period. Published surveys and academic estimates differ, so treat it as an assumption and test a range.
Is CAPM the same as cost of equity?+
CAPM is the most common way to estimate the cost of equity, which is the return shareholders require. That figure feeds into WACC and DCF valuations. Alternatives include the dividend discount model and multi-factor models such as Fama-French.
What are the limitations of CAPM?+
CAPM assumes investors are diversified, that beta fully captures risk and that a single market factor explains returns. In practice, factors like size, value and momentum also explain returns, and beta estimates vary with the time period used.
Results are estimates for educational purposes and are not financial advice. Rates, fees and terms vary — confirm with your lender or a licensed advisor before making decisions.