CAPM Calculator
Calculate expected returns using the Capital Asset Pricing Model
Capital Asset Pricing Model Calculator
Name of the stock, bond, or investment you're analyzing
Treasury bill yield or government bond rate
Expected market return (e.g., S&P 500 average)
Market risk coefficient (systematic risk)
Preset Scenarios
CAPM Calculation Results
CAPM Formula Breakdown
R = Rf + β × (Rm - Rf)
R = 2.4% + 1.0 × (10% - 2.4%)
R = 2.4% + 1.0 × 7.60%
R = 2.4% + 7.60%
R = 10.00%
Risk Assessment
Similar volatility to market, balanced risk profile
Performance Analysis
Real-World Example: Walmart Inc.
Given Information
Asset: Walmart Inc. Stock
Risk-Free Rate (Rf): 2.4%
Market Return (Rm): 10%
Beta (β): 0.47
Market Risk Premium: 7.6%
Expected Result: ~6%
Step-by-Step Calculation
Step 1: Calculate Market Risk Premium = Rm - Rf = 10% - 2.4% = 7.6%
Step 2: Calculate Asset Risk Premium = β × Market Risk Premium = 0.47 × 7.6% = 3.57%
Step 3: Calculate Expected Return = Rf + Asset Risk Premium = 2.4% + 3.57% = 5.97%
Result: Walmart's expected return is approximately 6%
Investment Interpretation
• Beta of 0.47: Walmart is about half as volatile as the overall market
• Lower Risk: Considered a defensive stock with below-average market risk
• Portfolio Impact: Adding Walmart to a high-beta portfolio reduces overall portfolio risk
• Return Expectation: 6% return compensates for the systematic risk taken
Beta Interpretation Guide
β > 1.5
Very High Risk
Highly volatile, speculative investments
β = 1.0
Market Risk
Moves exactly with the market
β < 0.5
Very Low Risk
Defensive, stable investments
β = 0
Risk-Free
No correlation with market
CAPM Components
Risk-Free Rate (Rf)
Return on government bonds or treasury bills
Market Return (Rm)
Expected return of the overall market (S&P 500)
Beta (β)
Measures systematic risk relative to market
Risk Premium
Additional return for taking systematic risk
Understanding CAPM (Capital Asset Pricing Model)
What is CAPM?
The Capital Asset Pricing Model (CAPM) is a foundational finance model that calculates the expected return of an investment based on its systematic risk. It helps investors determine if an investment provides adequate compensation for the risk taken.
Why Use CAPM?
- •Estimate required returns for investment evaluation
- •Calculate cost of equity for corporate finance decisions
- •Benchmark investment performance against risk
- •Portfolio optimization and asset allocation
CAPM Formula Explained
R = Rf + β × (Rm - Rf)
R: Expected return of the asset
Rf: Risk-free rate (treasury bills)
Rm: Expected market return
β: Beta coefficient (systematic risk)
(Rm - Rf): Market risk premium
Historical Context: Developed by William Sharpe, John Lintner, and Jan Mossin in the 1960s. William Sharpe won the Nobel Prize in Economics in 1990 for this groundbreaking work.
Key Applications
- • Equity valuation and DCF modeling
- • Portfolio management and optimization
- • Corporate finance and capital budgeting
- • Performance evaluation and benchmarking
- • Risk-adjusted return analysis
The Security Market Line (SML)
The CAPM relationship is visualized through the Security Market Line, which shows the expected return for any given level of systematic risk (beta). All properly priced securities should lie on this line.
Points on the SML:
- • Y-intercept: Risk-free rate (β = 0)
- • Market portfolio: β = 1, return = Rm
- • Slope: Market risk premium (Rm - Rf)
Investment Implications:
- • Above SML: Undervalued (buy signal)
- • Below SML: Overvalued (sell signal)
- • On SML: Fairly priced