Use this CAPM calculator to determine the expected return on an investment based on its risk compared to the overall market.
CAPM Calculator
How to Use the CAPM Calculator
To calculate the expected return of an asset using the CAPM (Capital Asset Pricing Model), input the risk-free rate, beta, and expected market return in the fields provided above, then click on the “Calculate” button. The result will be displayed immediately.
How It Calculates the Result
The CAPM creates a theoretical relationship between systematic risk and expected return for assets, typically stocks. The formula to calculate the expected return on investment is:
Expected Return = Risk-Free Rate + Beta * (Market Return – Risk-Free Rate)
Where:
- Risk-Free Rate is the return of an investment with zero risk, which establishes the minimum return the investor would expect.
- Beta reflects how much the asset price movement is correlated with the market movement. A beta of 1 means the asset’s price moves with the market.
- Market Return is the expected return of the market over the risk-free rate.
Limitations of the CAPM Calculator
The use of the CAPM has certain limitations. It assumes that beta is a sufficient measure of risk, which is not always the case as it does not take into account unsystematic risk. The model also presupposes that stock prices always react rationally to market movements, which market history proves is not always true. Moreover, it uses historical data to predict future returns, which can be inaccurate.
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