CAPM Calculator
Required return from the risk-free rate, beta, and expected market return.
How CAPM expected return is calculated
The Capital Asset Pricing Model estimates the return investors should require for holding a stock, given how much systematic (market) risk it carries relative to the overall market. It's the most widely used method for estimating cost of equity — the return shareholders expect in exchange for the risk of owning the stock — which feeds directly into WACC and discounted cash flow valuations.
The formula is: Expected Return = Rf + β × (Rm − Rf), where Rf is the risk-free rate, β (beta) measures the stock's volatility relative to the market, and Rm is the expected return of the broad market. Using this calculator's defaults — a 4% risk-free rate, a beta of 1.2, and a 10% expected market return — the expected return is 4% + 1.2 × (10% − 4%) = 4% + 7.2% = 11.2%.
Frequently asked questions
- What is CAPM used for?
- It estimates the return investors should require for holding a stock given its systematic (market) risk — commonly used as the cost of equity input to WACC.
- Where do I find beta and the risk-free rate?
- Use the Risk-Free Rate tool for a current 10-year government yield, and the Sector Beta tool if you don't have a company-specific beta — an unlevered sector beta re-levered to your own capital structure (see the Levered Beta calculator) is a common approach.
- What is the Capital Asset Pricing Model (CAPM)?
- CAPM is a model that describes the relationship between systematic risk and expected return for an asset. It says the expected return on a stock equals the risk-free rate plus a premium for the extra risk of holding that stock relative to the overall market, scaled by beta.
- What does the expected return from CAPM represent?
- It is the annualised return investors should demand for holding the stock given its risk — used as an estimate of a company's cost of equity in valuation models, not a prediction of what the stock will actually return.
- What is a typical risk-free rate to use?
- The yield on a long-dated government bond that matches your investment horizon — commonly the 10-year US Treasury yield for US equities. Use a local government bond yield for non-US markets.
- What is beta, and where do I find it for a stock?
- Beta measures a stock's volatility relative to the overall market — a beta of 1.2 means the stock tends to move 20% more than the market. Beta is published on most financial data sites, or you can estimate a company-specific figure using the Sector Beta and Levered Beta calculators.
- What are CAPM's limitations?
- CAPM assumes markets are efficient, beta is stable over time, and investors only care about systematic risk — none of which hold perfectly in practice. It also relies on estimates (beta, expected market return) that vary depending on the time period and method used, so different analysts can get meaningfully different CAPM outputs for the same company.
- How does CAPM relate to WACC?
- CAPM is typically used to estimate the cost of equity, which is one of the two inputs (alongside cost of debt) to the WACC calculation. See the WACC calculator to combine a CAPM-derived cost of equity with cost of debt into a single discount rate.