Capital Asset Pricing Model Calculator

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Reviewed by: **David Chen, CFA**
Chartered Financial Analyst and expert in investment valuation, risk management, and portfolio theory.

The **Capital Asset Pricing Model (CAPM) Calculator** determines the expected return on an asset, considering its systematic risk ($\beta$) relative to the market. Enter any three of the core parameters ($R_i, R_f, \beta, R_m – R_f$) to solve for the missing one.

CAPM Calculator

Instructions: Enter values for exactly three of the four core parameters (as percentages or decimals) to solve for the missing one.

Risk & Return Parameters (Enter as Decimals or Percentages)

Required Return on Asset ($R_i$) – [Q] (%)

Risk-Free Rate ($R_f$) – [F] (%)

Asset Beta ($\beta$) – [P] (Risk Multiplier)

Market Risk Premium ($R_m – R_f$) – [V] (%)

CAPM Formula

The core relationship for the Capital Asset Pricing Model is the Security Market Line (SML) equation:

$$R_i = R_f + \beta (R_m – R_f)$$ Formula Source: Investopedia

Variables Explained (Q, F, P, V – Parameters)

$R_i$ (Required Return, $Q$): The return an investor expects or requires for taking on the asset’s risk.
$R_f$ (Risk-Free Rate, $F$): The theoretical return of an investment with zero risk (e.g., U.S. T-bills).
$\beta$ (Asset Beta, $P$): A measure of the asset’s volatility relative to the overall market.
$R_m – R_f$ (Market Risk Premium, $V$): The additional return investors demand for investing in the general market rather than a risk-free asset.

Related Investment & Valuation Calculators

Use these tools to analyze risk and valuation:

What is the Capital Asset Pricing Model (CAPM)?

The Capital Asset Pricing Model (CAPM) is a foundational model in modern finance theory used to calculate the theoretically required rate of return for an asset, given its systematic, non-diversifiable risk. CAPM asserts that the required return is equal to the risk-free rate plus a risk premium scaled by the asset’s Beta ($\beta$).

CAPM is central to calculating the cost of equity, which is a critical component of the Weighted Average Cost of Capital (WACC). It is widely used by analysts and fund managers to make decisions about which assets to include in a diversified portfolio and to evaluate whether an asset is potentially underpriced (offering a return above the Security Market Line) or overpriced (below the SML).

How to Calculate CAPM (Example)

Assume the Risk-Free Rate ($R_f$) is 3% (0.03), the Market Risk Premium ($R_m – R_f$) is 5% (0.05), and the asset’s Beta ($\beta$) is 1.5.

Step 1: Calculate the Risk Premium
Multiply Beta by the Market Risk Premium: $$ \beta \times (R_m – R_f) = 1.5 \times 0.05 = \mathbf{0.075 \text{ (or 7.5\%)}} $$
Step 2: Add the Risk-Free Rate
Add the Risk-Free Rate to the calculated premium: $$R_i = R_f + 0.075 = 0.03 + 0.075 = \mathbf{0.105}$$
Step 3: State the Required Return
The required return on the asset ($R_i$) is $\mathbf{10.5\%}$.

Frequently Asked Questions (FAQ)

What is Beta?

Beta ($\beta$) measures how much the price of a particular asset moves relative to the overall market. A beta of 1.0 means the asset moves exactly with the market. A beta greater than 1.0 means it is more volatile than the market.

Why is the Risk-Free Rate essential in CAPM?

The Risk-Free Rate ($R_f$) represents the time value of money—the baseline return an investor should get simply for not consuming the money today. The remaining return must compensate for the risk taken.

What is Market Risk Premium?

The Market Risk Premium is the extra return investors collectively expect from investing in the market as a whole, compared to a risk-free asset. It compensates them for the market’s inherent systemic risk.

How is CAPM used in stock valuation?

CAPM provides the discount rate ($R_i$). Analysts then use this rate in models like the Discounted Cash Flow (DCF) model to find the Present Value of a stock’s future cash flows, thus estimating its intrinsic value.

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